Receiving lump sum or annuity?

Question

I will be receiving a settlement and they say I can either receive it in a lump sum or annuity. My thought process is that if I take the lump sum (780,000) I could put it in the bank and just withdraw interest accrued monthy and that would help pay the big bills (house, car, motorcycle) and that lump sum never gets touched versus if I choose the annuity, then the money never gets a chance to accrue interest cuz it would be much smaller amount and go straight to the bills, anyone have thoughts about this or think my idea is good or bad? b the way I'm 39 since people would ask how old I am , thanks

the settlement is an injury settlement which will be non-taxed but they did menton I will be taxed on any income generated from it, however they did mention that if i took the annuity I will not be taxed on any income generated from the annuity, they said thats the incentive of taking the annuity versus the lump sum. i won't get anymore details till later in the year (dec. or jan.)

Answer 1

The previous answers mentioned tax. This may or may not apply. You did not say what the settlement is for. If it is compensation for something you would not be tax for (IE an injury) it is not taxed. Also note: the annuity option MAY have interest built in. You should compare that rate (if applicable) to what you would earn from the bank. Your age is really NOT a factor unless the length of the annuity is tied to your life expectancy.
In most cases, I would recommend the lump sum. I believe I can earn a larger return than the annuity. Without more details, I can't address your specific situation.

Answer 2

Well there are several ways to look at it. First is the lump sum taxed or not. If it is not then you have $780K if it is then you have closer to $500K.
The real thing to find out is the annunity rate that the company is using. The settlement is the present value of an amount that would be paid over time, so in your case the lump sum assuming it is non-taxable of $780K is a lot less in total dollars that would be the total dollar value of the annuity, since it would include interest on the unpaid balance. The key is two things. One if it is taxable, your rate on the annuity would be lower than the rate of a one time payment. Two if you can return a higher rate than the after tax annuity payment on the amount you have to invest.
The smaller monthly payment of an annuity is not the way to look at it, you can take a portion of that money and put it back into the bank just like you are looking at taking the interest on the loan and paying bills. Honestly it's 6 of one and a half dozen of the other. It comes down to whether you believe you can earn more than the annuity rate.
Also if you have debt that is at a high rate to pay down that should figure into your interest earnings.

Answer 3

while you're taking a lump sum, you have given up the joint and survivor annuity. while you're married, i think of your important different has to sign off in this (finished the types), because of the fact a regulation surpassed to sidestep workers from disinheriting spouses without their know-how. in case you're taking the money straight away from the 401k, they'll withhold 20% for earnings taxes; then you definately pay tax on the full quantity withdrawn in case you do not placed it into an IRA interior 60 days (they'll nevertheless withhold the 20% till you roll it straight away into an IRA without taking the money your self), then you definately pay a 10% penalty while you at the instant are not 59-a million/2.

Answer 4

I understand your thinking...but that 780,000 in a lump sum to you has to be taxed remember? Any income will be taxed....by spreading it out in payments over a period of time you won't pay taxes all at once on the whole amount.