The Mega Millions lottery offers two jackpot payment options: the cash option or the annuity option. With the annuity option, the winner receives the full jackpot amount in annual installments over 29 years. Here’s a look at how the annuity works and what winners can expect if they choose this payment method.
Annuity Overview
The annuity option pays out the full jackpot amount through annual payments over 29 years. This allows winners to receive their winnings in smaller installments over time rather than getting the full lump sum up front. With each installment payment, a portion of the principal jackpot amount and any interest earned on it is paid out.
Annuity payments increase by 5% each year to help offset inflation. The installments are funded by federal government securities purchased by the Mega Millions consortium on behalf of the winner. These securities yield interest over time, allowing the total jackpot to be paid out with interest.
Winners do not have control over the investments funding their annuity. The securities are managed by the Mega Millions consortium to generate the annual payments. Winners cannot cash out their annuity early or borrow against future payments.
Payment Schedule
With the annuity, Mega Millions jackpot winners receive their first installment payment shortly after claiming their prize. After that, annual payments are made on the anniversary date of the initial payout.
The payment schedule is as follows:
- Payment 1: 5% of jackpot
- Payments 2-28: 5% of remaining jackpot balance
- Payment 29: Remaining jackpot balance
For example, if the jackpot is $1 billion, the first installment would be around $50 million. The second through 28th payments would each be approximately 5% of the remaining prize money. The 29th and final payment would be the balance left from the original $1 billion.
Benefits of the Annuity
The annuity option offers several potential benefits:
- Guaranteed income: Winners are guaranteed to receive the full jackpot amount through reliable annual installments.
- Protection from overspending: Smaller annual sums can prevent winners from overspending too quickly and running out of money.
- Hedge against inflation: The 5% annual increases help payments keep pace with rising prices over 29 years.
- Deferred tax payments: Taxes are only applied annually versus upfront on the lump sum, allowing funds to continue accruing interest.
- Passing on wealth: Future payments can be left to heirs if the winner dies before receiving all installments.
The annuity provides a steady, predictable income stream that can help winners responsibly manage their windfall over nearly three decades. While they don’t get quick access to the full amount, winners can rest assured knowing their jackpot is securely growing and funding future payments.
Drawbacks of the Annuity
While the annuity option offers some advantages, there are also some downsides to consider:
- No flexibility or control: Winners cannot access the full jackpot amount upfront or control how funds are invested.
- Loss of principal to taxes/interest rate: A portion of winnings go toward taxes and another portion toward interest paid to fund the annuity.
- Loss of privacy: Annual payments and taxes keep winners in the public eye versus taking a lump sum privately.
- Reduced value over time: Inflation slowly chips away at the real value of payments over 29 years.
- Potential layoffs: Budget cuts could harm the federal government’s ability to make future annuity payments.
Winners give up flexibility, control, and privacy with the annuity. And while annual 5% increases help, inflation still erodes the real jackpot value over decades. These factors make the cash option more appealing for winners who want full control immediately.
Cash vs. Annuity
Mega Millions winners face a choice between taking the jackpot as a lump sum cash payment or the full amount through annual annuity installments. Here’s a look at the key differences between the two options:
| Cash Option | Annuity Option |
|---|---|
| – Lump sum payment | – Annual payments over 29 years |
| – Typically 50-60% of jackpot | – Full jackpot amount paid out |
| – Must pay taxes upfront | – Taxes paid annually on each payment |
| – Full control over funds | – No control over investment of funds |
| – Privacy from lump sum payment | – Ongoing public attention with installments |
| – Responsibility to manage/invest funds | – Steady predefined stream of income |
| – Access to full amount immediately | – Must wait for full jackpot over 29 years |
| – Can outlive/spend winnings quickly | – Income for life through annual payments |
There are good reasons to choose either the cash or annuity option. The right choice comes down to a winner’s personal finances and priorities. Winners who wish to invest their own way or spend lavishly may opt for cash. But those concerned about long-term security can benefit from the annuity’s reliable annual income.
Taxes on Annuity Payments
Mega Millions annuity payments are subject to income tax annually. Winners are responsible for paying federal and any applicable state taxes on each installment payment before receiving the net amount.
Annuity payments fall under the tax category of “other income” on tax returns. The federal tax rate applied depends on each winner’s total taxable income for the year:
- 10% tax rate for incomes up to $9,950
- 12% tax rate for incomes from $9,951 to $40,525
- 22% tax rate for incomes from $40,526 to $86,375
- 24% tax rate for incomes from $86,376 to $164,925
- 32% tax rate for incomes from $164,926 to $209,425
- 35% tax rate for incomes from $209,426 to $523,600
- 37% tax rate for incomes greater than $523,600
State taxes typically range from 0% to 8% depending on the winner’s residence. Some states like Florida, Texas, and Washington don’t tax lottery winnings at all. Winners should consult a tax professional to understand their individual tax liability.
The recurring tax payments eats into annuity funds over time. But the annual structure allows a portion of winnings to continue accruing interest each year before taxes. And some winners may land in a lower bracket versus taking the lump sum upfront.
Death of a Mega Millions Annuity Winner
If a Mega Millions annuity winner passes away before receiving all their jackpot installments, the remaining payments go to their designated beneficiary or estate. This allows the full jackpot to be paid out even if the original winner dies during the 29-year schedule.
Winners are encouraged to set up proper estate planning to control distribution of any remaining Mega Millions payments after their death. Their heirs will continue receiving installments on the same annual schedule. Heirs also assume responsibility for applicable taxes on the inherited annuity income.
It’s important for annuity winners to keep their beneficiary designations up-to-date. Their state’s unclaimed property laws determine what happens if heirs cannot be located for future payments. Remaining annuity funds may end up going to the state rather than the winner’s desired beneficiaries.
Other Important Annuity Considerations
Here are some other key points for Mega Millions winners weighing the annuity option:
- Funds can’t be accelerated: Winners cannot opt to receive future annuity payments early. The payment schedule is fixed.
- Payments are non-transferable: Mega Millions prohibits winners from assigning or transferring future annuity payments to someone else.
- Protection from creditors: Under state laws, annuity payments are generally protected from creditors and civil lawsuits.
- Future changes possible: The Mega Millions consortium reserves the right to make changes to annuity payment structure for future winners.
- Location impacts taxes: Winners pay taxes based on their resident state when playing and claiming their prize. Moving to another state can’t avoid taxes.
- Withholdings vary: Mega Millions withholds federal taxes at a flat 24% rate. State taxes are withheld at varying rates based on residence.
Deciding Between Cash and Annuity
Choosing the best Mega Millions jackpot payment option is an important financial decision. Consider these steps when deciding between the cash lump sum and annuity:
- Understand the tax implications. Compare the upfront tax hit of cash versus annually spreading out tax payments.
- Determine current financial needs. How much money is required immediately versus what can be deferred?
- Think long-term. Will annual installments or investing a lump sum provide better lifetime security?
- Consider your personality. Are you disciplined enough to manage a lump sum responsibly or would installments help curb overspending?
- Setup a trust. This allows lump sum winners to invest conservatively and distribute funds gradually like an annuity.
- Consult experts. Talk to financial planners and tax advisors to help analyze the pros and cons for your situation.
- Compare investment opportunities. Would you earn higher returns investing a lump sum versus the effective return from annuity payments?
The annuity provides a simple approach to safely receive the full jackpot over time. But the cash option offers more flexibility and control. Weighing these factors carefully based on your needs and situation will lead to making the optimal payment choice.
Frequently Asked Questions
Can you choose both cash and annuity for Mega Millions?
No, Mega Millions winners must choose between the cash or annuity option. It is not possible to choose a portion as cash and the remainder as annuity payments.
What happens if Mega Millions goes bankrupt?
Mega Millions annuity payments are safe even if the game itself went bankrupt. Payments are guaranteed by the state lotteries that offer the game. Mega Millions also purchases government-backed securities to fund annuity payments to winners.
Are Mega Millions annuity payments variable or fixed?
Mega Millions annuity payments are fixed based on the announced jackpot amount. The payments increase by a predefined 5% annually to account for inflation. Winners cannot opt to change the payment amounts.
Can you leave Mega Millions annuity payments to heirs?
Yes, Mega Millions winners can designate beneficiaries to inherit any remaining annuity payments after their death. This allows the full jackpot to be paid out over 29 years regardless of the original winner’s lifespan.
How long do you have to claim Mega Millions annuity payments?
Mega Millions annuity payments must be claimed within 60 days of the announced win date. After 60 days, winners forfeit their claim to the prize. State unclaimed property laws determine what happens to unclaimed jackpots.
Are Mega Millions annuity payments eligible for early withdrawal?
No, Mega Millions prohibits winners from withdrawing any portion of their remaining annuity balance early. Winners must wait to receive payments according to the full 29-year annual schedule.
Conclusion
The Mega Millions annuity provides a conservative approach for responsible stewardship of lottery windfalls. While the cash option offers quicker access to funds, winners lose the lifetime guarantee of annual income payments. Weighing your specific needs and situation is key to choosing the right jackpot payout method.
Consulting financial experts can give you an objective view on how to maximize your lottery prize. With proper planning, either the cash or annuity can provide long-term financial security. Just don’t rush into a decision without carefully considering the implications over the next 29 years.