What are the different lottery payments and which is the smartest to take?

Teresa Crawford/AP

Long considered a harbinger of bad luck, millions of American lottery players hope Friday the 13th Mega Millions Grand Prize Draw January 13 will bring unfortunate numbers for everyone (except for themselves). With a grand prize of over $1 billion up for grabs, one or more entrants will be in the potentially enviable position of having to decide how they want their lottery winnings to be paid. The draw is scheduled for 11 p.m. ET on Friday evening.

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After 25 consecutive draws without a winner, the jackpot increased to $1.35 billion – the second-biggest Mega Millions prize of all time and the fourth-biggest in American lottery history – according to NBC 4 New York/WNBC. With odds of one in 302.6 million, if someone is lucky enough to match all six numbers, they can choose to have their winnings distributed in two different ways: as a 30-payment annuity over 29 years or in the form of immediate cash. lump sum.

Most winners go for the cash option, even if it means you get a reduced sum. For the current jackpot, the cash option is $707.9 million.

Deciding which option is best depends on a few different factors, ranging from your age and financial situation to how comfortable you are with investing. Here is an overview of some things to consider when choosing the best option, based on the information provided by Annuity.org and The annuity expert websites.

How are they taxed?

  • Cash payment: Federal income tax is due when you receive the cash payment. You could also move to a higher tax bracket for the year, which could triple your tax rate. Depending on where you live, you may also have to pay state and local taxes on your remittance.

  • Annuity option: Income taxes are deferred until payments are received. You will have certain tax obligations with the first immediate payment. After that, taxes will not come into play until you receive the annual payment for all subsequent years.

Annuity Benefits

  • The biggest advantage of an annuity is that you know you will have a stable, long-term source of income. It is the smartest option for people with a history of money problems, especially for small payments. Although it seems unlikely that someone raking in hundreds of millions of dollars in a single payout could go broke in no time, it’s not unknown. Taking the annuity option significantly reduces the risk of going bankrupt. Even if you die you can transfer the annuity to your heirs.

  • With an annuity, you can spread your taxes over a longer period of time rather than taking a big hit by accepting the lump sum payment. As GOBankingRates reported, a winner who takes the cash option on the current Mega Millions jackpot could end up with less than $707.9 million after the IRS gets its cut.

  • Due to the tax impact, winners who take annuity payments are generally closer to winning advertised jackpots than those who choose the cash option.

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Advantages of cash payment

  • The main advantage here is that you get a huge stack of money at the same time, right away, to do with what you want. The certainty of having cash on hand is probably why most winners choose the lump sum payment. This is a particularly attractive option if you are having financial problems due to high debt, medical fees or something else. A cash payment can move you from a position of financial weakness to a position of strength.

  • Even though annuity payouts tend to give you more of a jackpot than cash payouts, you can still make more money in the long run with a cash payout if you invest the money wisely. This is a smarter option for younger winners than older ones, as they have more time to weather the ups and downs of the market.

  • Although not the most likely scenario, you could end up doing better tax-wise with a cash payment due to the possibility of higher taxes in the long run.

To see: Working with a financial planner helps investors sleep better at night
Experts: What to do with your money if you win the lottery

The essential

From a purely monetary standpoint, it’s usually better to take the annuity option for the simple reason that you’ll get a bigger portion of the jackpot. But it’s not a one-time decision. If you need immediate financial assistance, it may make more sense to take the cash option. Likewise, if you are an experienced investor, you might be better off taking the payment in cash and make money work at once.

David Nadel contributed to the reporting of this article.

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This article originally appeared on GOBankingRates.com: What are the different lottery payments and which is the smartest to take?

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