Lottery Cash Value Vs. Annual Payments
After the excitement of winning the lottery wears off, you have to decide which payment option to take. When you win a large lottery payout, you typically have the option of choosing a lump-sum payment or annual annuity payments. While both options can be attractive, you may be better off taking one option over the other.
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Taking the Cash Value
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When you are chosen as the jackpot winner in the lottery, you typically have the option of taking a lump sum of cash. The cash value is generally half of what the advertised value is for the lottery. For example, if the advertised amount for the lottery is $20 million, the cash-value amount would be around $10 million or a little bit more. This means that if you take the cash value, you will not receive the full advertised amount.
Annuity Payments
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When you choose to take the annuity payments, the value of your payments can fluctuate. By taking the annuity payments, you have the chance to get the full advertised value of the lottery. If you choose to take the annuity payments, the lottery commission will put the money into investments. Then you will receive regular payments from the investments. For example, the money might be put into bonds, and then you receive interest payments from those bonds.
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Investment Returns
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When deciding between the lump sum and the annuity payments, look at the investment returns. Calculate the return on investment you would receive if you accepted the annuity payments. Then compare that to what you could get by investing the lump sum in the market. If the returns in the market are typically higher than the interest rate that comes with the annuity payments, it makes sense to take the lump-sum payment option.
Tax Implications
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When you receive money from a lottery payment, you have to consider the tax implications. If you receive a lump-sum payment, you will have to pay taxes all in the year that you receive the money. This could be a very large payment to the Internal Revenue Service, and to your state government if applicable, all at once. If you take the payment option, you will only pay taxes on the money as you receive it. This spreads out the tax hit and can make it easier to deal with.
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