Winning the lottery. It’s a dream that everyone has. Walking into the corner convenience store, spending a couple bucks on tickets, scratching off one of them to find a big winner. How much were the winnings? Ten million? Twenty? More? Whatever it is, it is amazing, and more money you ever thought you’d have. But what do you do now? People talk about the lottery and how much the newest lottery payments are, but nobody ever tells you what to do when you win the lottery. It’s a mystery to a lot of people.
Generally, there are two options for lottery payments: lump sum and annuity. When most people think of winning the lottery, their first thought is to opt for a lump sum. This means that you will get one large amount of money all at once. Your first thought is probably: “great! The winnings were $30 million! That means I’ll get $30 million, right?” Wrong! When the lump sum is chosen, a lot of the lottery money is withheld, and you won’t get much more than just over half of the total winnings. So, if you won $30 million and chose the lump sum, you’d only really be getting about $17.4 million or so. Typically, it’s only about 58% that you actually get to keep. A lot of the withheld money (about 25% of it) goes to federal tax, and six to nine percent of it goes to state tax.
The other option is to go with the annuity. Lottery annuity is dealt out in several payments over the course of many years. The Mega Millions lottery, for example, gives you one immediate payment followed by 29 yearly payments, with each increasing in amount by about five percent. In contrast, the Powerball annuity consists of 30 yearly payouts that increase each year. Receiving your lottery payments in this fashion typically means that you’ll get the entirety of your winnings.
Each side has its own pros and cons. While you may think that going with the annuity is now the obvious choice, it may not be. Nearly 1 in 5 Americans between the ages of 18 and 24 consider themselves in debt hardship, and, depending on the severity of the debt, may not be able to wait each year for their payments. On the other hand, the annuity makes it more difficult to recklessly spend your winnings, and the money can be saved or even invested. You may be living the dream, but there’s more to it than most immediately know. Be sure to look at your financial situation and all of your available options before making the final decision.