We all think about it and we all wonder how we would do if we would win. The lottery that is.
But, I think you would agree with me in realizing that very few of us do any kind of research to find our best options if, and when, we do. That’s why I’m here to help.
Many of the people who lost everything they own by winning the lottery lost it because they had little financial education.
There are two types of lottery wins you will be able to choose from. They are the annuity or the lump. I’m going to go over them and then show you some things to look at when making your choice on which one you’ll be taking. From the outset, I’m not a financial adviser, so the information I present will give you the information I found when researching for this article. Be sure to communicate with your adviser regarding which direction is best for you.
I highly recommend that you consult a financial adviser in making your decision to take the lump sump payment or before choosing the annuity option. The goal is to make any decision, such as investing, smart decision-making and take into account how your tax rate will be affected as well as your income tax. Lottery wins can be life changing and we want them to be life changing in a good way for you.
Lump Sum: The lump sum is taking all of your winnings minus any taxes and or fees owed from the collection of it. When you take either part you will automatically have like 38% taken off the top and the rest will be yours. You will have a taxable event and will be taxed at the highest tax rate for ordinary income which at the time I researched for this article was 37%. On top of that, there will be money taken for social security.
Annuity: The annuity is taken in the form of payments. This is payments for 29 years after an initial payment equaling a total of 30 payments over a 30-year period. Each payment increases by 5% yearly until that last payment completes the amount of the winnings.
The Powerball Jackpot is a lottery jackpot available in either lump a sum or annuity. It’s jackpots go from $40 million on up to $1 billion. One of the interesting things about the Powerball jackpot is no matter what the size of the jackpot, you will have only a 1 in 24.9 chances of winning. In fact, according to Powerball.com, even if there are more tickets than are sold, you still have the same chances to win.
The Powerball has a lot of variety and it has 9 ways of winning. All the prizes are cash prizes except for the grand prize. Many play and just keep playing hoping they’ll win. Some give up before they do and, as always, it’s recommended to play for fun and not for investment.
MegaMillions is a multi-state lottery. It’s available in 44 states and first came into being around 2002 when states began to want a multi-state lottery system. It has 2 ways of getting your winnings as well such as annuity and lump sum.
This is the million dollar question, pardon the pun. The one thing to remember is that many people that win the jackpot blow the money very quickly and some end up worse than before they played. In some of those cases, they are millions of dollars in debt from using their winnings irresponsibly.
You should look at how each would affect you. For example, how would taking the lump sum versus the annuity affect your current taxable state and how much would you really take home from each.
- Taxable event – With the winning of the lottery, you create a taxable event…maybe. When you experience a gain then you are taxed on that amount. This means it can immediately place you in a much higher tax bracket than you are now. I’m going to include a link below to explain in a more detailed how an annuity affects you and your income.
- Annuity – This will create the necessity for being taxed as well but in a different way. In this scenario, much depends on how much you are bringing in already and what tax bracket it now puts you into. Most people take the lump sum. This is probably because it appears they will get more money with the lump sum and they want it all up front rather than over a period of time.
- And… – In doing research for this article I found an article in Investopedia that gives an option that most haven’t thought about. In this article, they suggest a way of handling the money by taking a portion of their lump sum earnings and creating a private annuity. This can help if you are worried that you will not handle the money as well as you would hope you would.
Learn more about some of the intricacies of a lottery annuity, by checking out my post on 3 Things you Need to know about the Powerball Annuity. Learning more about how to handle what will happen when you win that big amount will help to alleviate some of the pressure that comes with such a big life experience.
The main thing to do when deciding whether it is going to be the lump sum or annuity is to remain calm and get some advice about your present state of your finances and your goals with them. Every investor, well, every good investor, has an exit strategy. Most have it in place before they invest. That would be a best practice here. Dream about winning but plan for what will help you sustain what you have and how the winning will transform your life. If you do this, then you can make sure it’s a positive transformation in your life and not a negative one.