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Should you take lottery winnings in a lump sum?

Winning the lottery is a dream come true for many people. When you get that big check, one of the first things you’ll need to decide is whether to take the winnings in a lump sum or an annuity. Both options have pros and cons, and the right choice depends on your specific circumstances. This article will go over the key factors you need to consider when deciding between a lump sum or annuity payout for lottery winnings.

How lottery payouts work

Lotteries give you a choice between taking the entire jackpot amount in one lump sum payment, or spreading the money out in annuity payments over many years.

Here’s how it works:

Lump sum – You get the entire jackpot amount upfront, in one payment after taxes are taken out. The advertised jackpot is the amount you’d get if you choose the annuity option. If you take the lump sum, you get a smaller amount because it’s the “cash value” of the full jackpot.

Annuity – The jackpot is paid out to you in a series of annual payments over typically 20 or 30 years. Each payment is 5% or 6% less than the previous one. You don’t get access to the full amount right away, but the total payout adds up to more than the lump sum.

Annuity payments are deferred payments, meaning you don’t get the first check until several months after winning. This waiting period lets the lottery invest the money and earn interest on it in the meantime.

Factors to consider

When deciding whether to take a lump sum or annuity for lottery winnings, here are some key factors to weigh:


Lottery winnings are taxed as ordinary income by the IRS and most states. The top federal tax rate is 37%, and state taxes can be up to 13.3%.

With a lump sum, all the taxes are taken out immediately. With an annuity, taxes are only assessed on each payment as you receive it. Depending on your tax situation, either option could result in a lower overall tax bill.

Investment opportunities

A lump sum puts all the lottery money in your hands right away. This gives you the most flexibility to invest the money however you want. You can earn potentially higher returns by investing the lump sum wisely compared to the set rate of return with an annuity. However, improper investing also carries a risk of losing money.

With an annuity, your winnings are conservatively invested by the lottery. The annual payments are fixed and guaranteed for decades. While you lose control over the investment options, the annuity provides stable, predictable income for life.

Life circumstances

If you have urgent short-term needs – like paying off debts, buying a house, or funding college for kids – a lump sum gets you the money right now. With good financial planning, a lump sum also allows you to make a bigger impact on causes you care about through charitable giving.

However, winning such a large amount can also lead some people down the path of irresponsible spending and squandering the money quickly. The discipline imposed by an annuity prevents this from happening and stretches out your newfound wealth.

If you already have wealth and financial security, the flexibility of a lump sum may be more valuable to you. But if you live paycheck to paycheck, annuity payments provide a stable supplement to your current income over time.

Age and health

A major factor is your age and life expectancy. If you’re young, you’ll potentially miss out on decades of annuity payments by taking the lump sum. But if you’re older or have health issues, you may not live long enough to receive all the annuity payments – so the lump sum makes more sense. Make sure to factor in your personal health and family medical history.

For recipients focused on leaving inheritance, annuities guarantee that the lottery money will keep benefiting your heirs for many years after you’re gone. Lump sums give you more control to distribute the wealth through your estate as you choose.


Inflation erodes the purchasing power of money over time. While annuity payments provide steady income, they don’t include cost-of-living increases to keep pace with inflation. So $1 million spread out over 30 years will likely buy less and less each year.

A lump sum allows you to make financial moves – such as investments with higher returns than inflation – to try maintaining the value of your winnings over time.

Fees and penalties

While annuities offer stable income, most don’t let you change your mind once payments begin. There are usually no options to take the remaining amount in a lump sum later or exchange future payments for a lump sum.

Many lotteries do allow winners to transfer annuity payments to a third party investor in exchange for an upfront lump sum through a legal process called selling structured settlement payments. However, the offers typically only amount to around 50-70% of the remaining annuity balance – meaning you take a significant loss.

Tax considerations

Taxes often play a pivotal role in the lump sum vs. annuity decision for lottery winners. Here are some key tax implications to keep in mind:

Federal taxes

Federal taxes apply to all lottery winnings over $5,000. The top federal tax rate is 37% as of 2023. Tax rates on long-term capital gains max out at 20%.

For lump sums, the entire amount is immediately taxed at the 37% rate. For annuities, taxes are only applied when each payment is received. The rates apply based on your taxable income in that specific year. So you may be able to take advantage of lower tax brackets each year.

State taxes

Most states also tax lottery winnings. State tax rates range from zero in states with no income tax up to a maximum of 13.3% in California as of 2023.

Your state of residence and where you purchased the ticket can impact how state taxes apply. Some states let you deduct federal taxes paid when calculating state taxes.

Investment taxes

If you invest a lump sum, taxes apply to any earnings. Short-term capital gains are taxed as ordinary income. For investments held over 12 months, long-term capital gains rates of 0%, 15% or 20% apply based on income. Qualified dividends are also taxed at long-term capital gains rates.

Impact on tax brackets

Receiving a large lump sum all at once could push you into higher federal and state tax brackets for the year. Annuities spread out the tax liability, allowing you to remain in lower brackets.

Let’s say you’re single, 65 years old, and normally have an annual income of $50,000:

– With a $10 million lump sum, a big chunk of your winnings will be taxed at the top 37% rate.

– With a $500,000 annuity payment each year, you stay in the 22% bracket and pay roughly $100,000 less in federal taxes overall.

The benefit of lower brackets often makes annuities the better tax option.

Change in residence

If you use a lump sum to buy property in another state, you may establish legal residency there in the process. This could expose your winnings to a new state’s taxes. Annuities can reduce this risk.

You may also want to consider moving to a state with no income tax, like Florida, before claiming a lump sum. This lets you entirely avoid state taxes. Quickly establishing residency before claiming prize money is key.

Investment opportunities with a lump sum

The primary advantage of taking a lottery jackpot as a lump sum is having full control over a large amount of cash immediately. This provides unique investment opportunities compared to receiving structured annuity payments.

Here are some examples of how savvy investing of a lump sum could generate significantly higher returns:

Stock market

Investing a lump sum in a diversified portfolio of stocks exposes your money to the long-run average annual returns of the stock market, around 7% after inflation. While markets are volatile in the short term, stocks have proven to be one of the highest-returning asset classes over decades.


Bonds provide steady interest income at relatively low risk. Government and high-quality corporate bonds currently yield 4-6%. Municipal bonds are exempt from federal taxes, so they provide tax-efficient income.

Real estate

Buying rental properties with a lump sum can produce ongoing income along with lucrative appreciation over time. Average annual returns on real estate range from 7-12% historically.

Business ventures

Starting or investing in a business with your lump sum allows you to pursue entrepreneurial objectives. Seeking high-growth opportunities could potentially generate very sizable returns.

Private equity

Once you have at least $1 million to invest, allocating a portion to private equity investments opens up opportunities not accessible to regular investors. Average private equity returns historically exceed 10% a year.

Pros of taking a lump sum

Here are some of the biggest upsides to taking lottery winnings as a one-time lump sum payment:

Full control over money

The freedom to use your winnings however you want is the main allure of the lump sum option. You can splurge, donate to charity, help out loved ones, or pursue any investments and life goals you have in mind.

Potentially higher returns

If you have the discipline and investing savvy, a lump sum gives you a chance to grow your wealth faster through stocks, real estate, or business ventures. Historical market returns are likely to beat annuity rates.

Immediate access

All the money is available right away to spend or invest. With an annuity, you only have access to each year’s payment. If an urgent need for a large amount of cash comes up, a lump sum makes this possible.

Avoid lottery investments

You remove dependence on the lottery commission to handle investing your winnings prudently. A lump sum lets you control where funds are invested based on your own strategy and comfort level.

Eliminate longevity risk

If you opt for an annuity but don’t live long enough to receive all the payments, you can lose out on years of money. A lump sum guarantees access to the full amount while you’re alive.

More estate planning options

Heirs only receive remaining annuity payments after you pass away. A lump sum allows you to distribute winnings however desired through vehicles like trusts, avoiding probate.

Peace of mind

Finally holding a big check for millions can provide a psychological benefit and peace of mind for some lottery winners. An annuity leaves the full amount as a more abstract future benefit.

Cons of taking a lump sum

There are also some potential downsides to weigh when deciding whether to take a lump sum payment:

Less money overall

Lump sums are typically about 50-70% of the advertised jackpot. You’ll receive a lower upfront amount compared to the total you’d get from an annuity over 20 or 30 years.

Discipline required

With annuities, money is guaranteed to last decades. Splurging or mismanaging a lump sum could burn through it quickly. Not everyone has the discipline to properly invest or conserve such sudden wealth.

Easy target for lawsuits

Coming into a large pool of accessible money can make lottery winners targets for frivolous lawsuits and shady investment pitches. Annuitizing helps shield some wealth.

Tax burden

Receiving the full amount at once may push you into much higher tax brackets all in one year. An annuity spreads out the tax hit over each annual payment.

Inflation risk

Annuity payments are fixed, so they lose purchasing power over time. But a properly invested lump sum has the potential to outpace inflation.

Dependence on investments

Optimal returns from stock and real estate investments are never guaranteed. Your lifestyle depends heavily on achieving strong enough returns from investing the lump sum.

No longevity protection

If you live past life expectancy and outlive your lump sum, you could run out of money. Annuities provide guaranteed income for life no matter how long you live.

Should you take the lump sum or annuity?

Here is a summary of key factors to help decide whether taking lottery winnings as a lump sum or annuity is the better choice for you:

Consider taking the lump sum if… Consider taking the annuity if…
You have experience managing large amounts of money You don’t have experience managing large finances
You want flexibility and control over investments You value the security of guaranteed fixed payments
You have reason to expect a shorter than average lifespan You come from a family with longevity
You have debts to pay off or large purchases planned soon Your current income is already sufficient for your needs
You expect to be in a low tax bracket this year You would be pushed into much higher tax brackets
You want to quickly impact charitable causes Wealth preservation for future generations is your priority

In many cases, spreading payments out through an annuity provides valuable protection against the risks of a lump sum for inexperienced and conservative lottery winners.

But for savvy investors with a solid financial plan in place, taking the lump sum can maximize flexibility and potential returns.

Talk to a financial advisor

Before deciding whether to take a lump sum or annuity for lottery winnings, it’s highly recommended to speak with a qualified financial advisor. Look for a fee-only fiduciary advisor to ensure unbiased advice that prioritizes your best interests.

A financial advisor can help analyze your specific situation, lifestyle needs, time horizon, and risk tolerance. They may recommend a hybrid approach – taking some of the winnings as a lump sum to have on hand, while annuitizing the majority to guarantee lifetime income payments.

With sound professional advice, you can feel confident pursuing the best payout option aligned with your financial goals and priorities.


Winning the lottery is an exciting windfall, but collecting your prize money involves some big financial decisions. Weighing the trade-offs between taking a lump sum or spreading out payments through an annuity requires assessing your specific circumstances. While annuities offer security through guaranteed income, lump sums provide flexibility for investing and enjoying the winnings. Seeking input from financial and tax experts can help lottery winners choose the ideal payment approach. With prudent planning, even enormous windfalls don’t have to be squandered, allowing the money to provide lasting benefits for yourself and heirs.