Cash or Annuity?
Lottery jackpot winners have the choice of taking the full prize in 30 payments over 29 years (the first instalment is paid immediately), or accepting a reduced cash lump sum.
The advertised jackpot value shows how much the jackpot would be worth with 29 years of interest from investments the lottery operator makes.
The option of accepting annual payments is called an annuity.
The cash lump sum option is lower because it represents the amount of money available in the jackpot fund from ticket sales at the time of the draw. In theory, if you invested the cash lump sum for 29 years, you would end up with the advertised jackpot amount.
For example, when Mavis Wanczyk of Massachusetts won the Powerball jackpot in August 2017, she was given the choice between collecting $758.7 million over 29 years, or $480.5 million right away. She accepted the cash option.
The value of the annual annuity payment is graded to grow by 4 percent each year to compensate for cost of living increases. Payments are guaranteed to the player by the U.S. government, even if the securities in which the lottery invests do not yield the expected return.
The vast majority of winners accept the cash payment, with some believing they can gain a bigger return than the lottery on investments and others simply preferring to become fabulously wealthy right away. However, some see the annuity payment as being a more sensible choice, since it guarantees an income for 29 years.
With regards to taxes, they are only payable on income earned in a given tax year. Therefore, winners who choose to receive their prize as a cash lump sum will pay taxes a single time on that payout. However, you will still need to pay taxes on income you receive from the sum in the future.
Winners who choose the annuity payout option (annual payments over 29 years) pay taxes on each annual payment. The tax rate depends on the value of each payment.
Can a Lottery Annuity be inherited?
If you die with a lottery annuity, the exact procedure will depend on the specific rules of the lottery that you won. However, generally the answer is ‘yes’; annuity payments will continue after someone dies.
Some lotteries will pay a lump sum into the estate of the deceased, but others will just continue to pay the annuity payments as if nothing had happened.