Every week, millions of people dream about winning big in the lottery only to be disappointed. Some lucky individuals however win by pure chance, becoming overnight millionaires, or so some would believe. In truth, most of those who play the lottery don’t know the difference between lump sum and annuity payments, let alone the specifics behind lottery payments. Whether you’ve just won the lottery or you’re still dreaming, it helps to familiarize yourself with the lottery annuity payout system.
Many people don’t realize that lottery winnings are heavily taxed by federal and state alike. Instantly, 25% of your winnings will be taken by the lottery to cover federal taxes. After that the state will usually tax the remainder for an additional six to nine percent depending on state. On top of all of this, there are a number of stipulations that if broken could result in more fees.
While the exact schedule of payments will differ from lottery to lottery, there is a difference between lump sum and annuity payments. A lump sum is received in the case of small winnings, but larger winnings take the form of annuity payments scheduled over the course of several years. The Mega Millions annuity begins with an initial payment followed by 29 annual payments that each increase over time by about 5% each time. Likewise, the Powerball annuity consists of 30 annual payments of increasing value. Many people don’t have the time to wait 30 years to get all of their money, which is why many sell annuity payments for a lump sum of cash. Selling of an annuity can cost surrender changes of up to 10%, but if you need money quick it is the best option to get the most of your money quickly.