After you win the lottery, you basically have two ways of receiving your winnings: as a lottery lump sum payout, or as an annuity settlement. If you choose a payout, you’d receive all your winnings at once. In a lottery annuity, you’d receive them as payments over time.
While it might seem appealing to get all your winnings at once — why wait, after all — an annuity offers several advantages. Here’s how.
Less Is Taken in Taxes.
If you choose to receive your winnings as lottery payments rather than as a lottery payout, then you’re likely to get less money taken out in taxes. The more winnings you receive, the higher the tax bracket you’d be in. Taking it all as one payout would put you in the highest tax bracket, most likely. Choosing an annuity would still put you in a different tax bracket, but you’d get a better tax cut. Plus, tax rates can also increase or decrease year over year, which means that you may have to pay even less taxes the next year when you receive your annuity payments.
More Financial Security Is Provided.
If you choose an annuity, you’ll have another form of income, allowing you to have more financial freedom. Although an annuity’s payments may not be enough to live off of each month or year, it can still help pay for whatever bills might come your way. In other words, it can act as a financial safety net.
An Annuity Can Always Be Sold.
Life might someday throw a big bill at you, which might make it tempting to have all the money on hand at one time. How else might you pay for a hospital bill, car bill, or college tuition? Fortunately, if you don’t have the money to cover such costs, you can always sell your annuity. Sure, it won’t be as much if you had gotten the whole lump sum since you’ll have likely used some of the money, but you at least have the option to get all your money when you need it.
If you have any questions, feel free to share in the comments.