I know I’m not alone in this, and occasionally you and your family are sitting around talking (and dreaming) about what you would do if you won the lottery. As the purchases get discussed, the topic arises of how you would take the money, in a lump sum, or as an annual payment over the next 25 or 30 years.

I’ve most often heard to take the annuity option as you will be taxed more with the lump sum. This can be true; however, each scenario must be analyzed to be sure.


Lottery Taxes

Did you know that each state taxes differently on lottery winnings? South Carolina’s tax is 7% and there are a handful of states that have a 0% lottery tax rate like Florida, Texas, Tennessee, South Dakota, Wyoming, California, Delaware, and Washington State.

Federally, the minimum you will be charged is 24%, and typically that will jump all the way up to 37% if you take the lump sum payment due to being in the highest tax bracket.


Present Value of Money

This concept is quite detailed but to explain it in layman’s terms, a dollar today is worth more than that same amount in the future. If you were to receive $100 today and $100 in ten years, that $100 today is worth much more than in 2033.


Example

You win the lottery this weekend which amounts to $30 million.

The lottery commission offers you these two options:

  • A pre-tax lump sum payout of $15 million.
  • An annual pre-tax payment of $1,200,000 over the next 25 years.

Utilizing these figures, we find that the discount rate is: 6.97%

This means, if you took the lump sum payout, and invested the entire amount, you’d need to produce better than a 6.97% average annual return to outperform that $1,200,000 income stream.

If you do not believe you can yield a better return than the discount rate, then the annual payments option is best.

If the commission offered you a different payout scale and the discount rate was at 3%, would you take the lump sum?


You more than likely won’t hit a multi-million-dollar lottery in your lifetime, but one day you could be entitled to compensation for one reason or another, and you are afforded the choice between a structured settlement or a lump sum. This technique can be used for this scenario as well!


Click here for some further reading on the present value and the future value of money.

Click here if you’d like to set up a meeting with Dave or me and figure out what to do with all your lottery winnings!