Is it true that taking annuity instead of cash when winning the lottery you get more money paid to you?

Question

If it is true How?

Answer 1

Yes, and no. When you take an annuity, you get paid over time, but when you take cash, you get paid all at once, but not the full amount (otherwise, everyone would take the cash choice). For example, if you won $1,000,000 and chose the annuity, and the annuity was for a period over 20 years, you would get $50,000 per year, before taxes, and that would add up to $1,000,000 before taxes. Now if you chose the cash option, you would get say $500,000 before taxes, but you would have that $500,000 right away instead of getting $50,000 per year. If you wanted to invest that money, more than likely taking that $500,000 and investing it, you would end up with more than the $1,000,000 from the 20 year annuities, over the course of time. Now if you know that all you would do with either the cash option or the annuity option is blow the entire amount of money, then you'd probably be better off taking the annuity, since you'd have 20 years to blow it all, instead of blowing $500,000 in one year. I'm not even going into the taxes effect, but with either option you would have to pay taxes on your winnings.

Answer 2

This is a "time value of money" issue. In total dollar bills, yes, you get more dollar bills if you take the annuity. However, this means you get some dollar bills now and some next year and some more the year after for 20 years, usually. You probably are old enough to have seen that a dollar today buys a lot less than a dollar did 5 years ago - or 10 years ago.

So how this works is that the organization paying out the winnings can invest the money they have earned from ticket sales and earn interest on that over time and pay you out over those 20 years . . . OR . . . you can just take the money NOW - today - in cash. Yes, it's fewer dollar bills. But it's probably worth about the same as if you took the annuity.

Hope this helps!

Answer 3

The greatest reason most people get more money is taxes. Taking it all in one chunk puts you way up in the tax brackets and takes more out than if you got the money spread out over 20-25 years. Unless the annual payment is so big it puts you into the same bracket.
And the trade off between you getting the reduced money now and investing it, vs taking the annuity is the interest the lottery uses to buy the annuity. The higher the interest they can find, the lower they have to pay you now. But once you have your hands on the money (less taxes), can you get as high a rate on your investment as an individual? At how much risk? You would have to make about a 30% higher interest rate to overcome the loss in initial taxes.

Answer 4

California Super Lotto winnings can be taken as a series of 26 annual payments.

If you want the cash value, you will receive the cost to the state of purchasing a series of zero coupon bonds that would equal the 26 annual payments.

If you take the 26 annual payments you will receive more actual money. But consider the following. If you were offered $1000 today or $1000 25 years from now, which would you take? If you took the $1000 today and invested it in a Treasury bill earning 5.20%, in 25 years you would have $3,551.35.
$1000 paid 25 years from now has a current value of $281.58 (assuming 5.20% interest rate).

CA Super Lotto pays the cash value of jackpots at 45% - 55% depending on interest rates. Federal income taxes are due for the year the payment(s) is(are) received (lump sum or 26 annual payments).

Answer 5

Yes you do - think of it as getting interest on the money that is held for you instead of it being all paid to you at once.

Answer 6

yes you get the full amount less taxes