How to Pay Out a Lottery Jackpot

While winning a lottery jackpot is a dream for many, it’s not without its pitfalls. One such pitfall is how to handle the payout. The choice of how to receive the prize money is an important one, but it’s also one that requires careful consideration and likely the input of experts, such as a financial planner or wealth management adviser.

Generally, lottery winners have the option to choose either an annuity payment or a lump sum. An annuity will pay out annual payments for decades, while the lump sum will provide the winner with a much smaller amount upfront. This is due to the time value of money, as well as income taxes, which must be withheld from the lump sum payment.

For example, let’s say you win a lottery jackpot of $10 million. If you take the lump sum, your initial payment will be less than what’s reported on the ticket as a total prize (because taxes and discounts are taken out). And the IRS will withhold 24% of that amount off the top, so the net amount you receive will be significantly lower.

But if you opt for the annuity, you’ll be receiving annual payments that will grow over time and rise with inflation, so they’ll be larger than the initial lump sum. Plus, you’ll be paying taxes on the payments as you go, which is better than paying the top rate of 37% on your entire prize after tax withholdings and other deductions are applied.