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Should Lottery Winners Take the Lump Sum or Annuity Payout?

It is common for lottery players to wonder whether they should take the lump sum or annuity payout, as those options are often available in many lottery games. Before anything else, it is important to realize that there is more to that decision than simply looking at how much you would receive with each alternative.

You need to understand all the real differences between lump sum and annuity payouts. That will be the first step to realizing that the answer might change depending on your current situation, plans, and even your life expectancy. Everything is covered on this page.

What Is the Difference Between Lump Sum and Annuity Payouts?

Lump-sum payouts are paid at once and are already reduced by about 30% when compared to the advertised jackpot. In other words, players receive considerably less if they decide to get their money all at once. That is a fairly common option when someone wins the lottery because you can get hold of a large amount of money, which is the dream of every player.

On the other hand, annuities are payments made once every year during a specific period, e.g., 29 years plus the initial payment. It gets close to the advertised jackpot and is easier on taxes because of the volumes. Depending on the prize, the annual payment can still be a very generous amount.

Let’s use the United States as an example because of its taxes and its popular games with those options, like Mega Millions. lump-sum payouts immediately pay 24% on federal taxes.

Pros & Cons of the Annuity Option in Lottery Prizes

Now that you know the difference between lump sum and annuity payouts, it will most certainly help to learn the pros and cons of each alternative. In general, you should have anything between 15 and 60 days to determine what you will take when you become a lottery winner, but it would help to already know what you want. Let’s start with the polemic annuities.

Pros of Annuity Payouts

  • Annual Income – You will have time to plan how you will invest and use your money, aside from the fact that you can relax knowing that there is a passive income every year for decades.
  • No Pressure – Dealing with a large amount of money can be difficult, especially when others know about it. When you opt for an annuity, nobody can claim that you have spare money to help them when you do not want to.
  • Control – A steady inflow of money is easier to control than having your bank account multiplied by the thousands overnight. There are many big lottery winners who went bankrupt.
  • Larger Prizes – It is impressive to see how many people are not aware of the fact that the advertised jackpot is only possible when you opt for an annuity. Without the deduction, you will receive a lot more money in the end.

Cons of Annuity Payouts

  • Long Term – When you receive a portion of the prize once a year, there are many plans that might not be possible to put into practice, like when you take a lump sum payment. You need to be patient and make small investments.
  • Uncertainty – Will you live to enjoy all the possibilities that the money will bring over time? There is no way to be certain of it, and annuities cannot be rushed.

Pros & Cons of the Lump Sum or Cash Option in Lottery Prizes

Most of the lottery winners’ stories that we hear are about people who made the cash option and took a large and singular sum when they claimed the prize. There are more obvious cases in which that is a better option, such as lottery group plays when the prize is reduced a lot. However, we should understand both the pros and cons of that alternative.

Pros of Lump Sum Payouts

  • Rapid Growth – With the correct assessment and decisions, the large money taken from the lump sum payout can be a really interesting investment that will grow a lot more than small investments.
  • One Time – It may sound obvious, but some winners prefer to just pay the taxes and get things going at once and feel left at peace for the rest of their lives.
  • Inheritance – In the case of inheritance taxes, the large sum being available can help pay them, while annuities might make it difficult to make up for them.
  • Instant Dreams – When you receive all the money at once, you can put all your plans into action. New businesses, traveling, gifts, everything becomes possible!

Cons of Lump Sum Payouts

  • Deductions – The lottery taxes, which you can verify with our lottery tax calculator, are bigger when you take a larger sum at once. Also, the prize is often reduced by about 30% from the advertised jackpot when you take the full cash option.
  • Lack of Control – This con is particular to every winner, as it depends on how ready you are to become rich or an instant millionaire. We have a guide on what to do if you win the lottery, and that can help you avoid the lack of control that makes people bankrupt.
  • Pressure – It is almost impossible to avoid pressure from family and/or friends when you instantly eliminate your financial problems and have the capacity to eliminate theirs.

Comparison Table: Should You Take a Lump Sum or Annuity Payout?

Payout Option Lump Sum Annuity
Prize Immediate, but only around 70% of the advertised jackpot before taxes Divided into annuities, usually 30 years
Taxes 24% of federal taxes + income tax + state tax 24% of federal taxes + income tax (proportional) + state tax
Investments The capacity of investing large sums of money. Necessary to have good management and a financial plan to make the regular payments grow.
Liquidity The money after taxes is yours to do as you please. You will never be capable of withdrawing the pending annuities.
Best For People who are prudent and have a good management plan for the prize with investments. Those who are not concerned about having a huge change of life and that prefer regular income for decades.

Real Example: Mega Millions Annuity or Lump Sum Payment?

Let’s imagine a real situation of a millionaire prize to give you a true example of the decisions you would have to make. There is a Mega Millions drawing worth $370 million, and you win it. That’s great! In the case that you had opted for 30 annuities, you would receive around that total after the three decades of annual prizes.

On the other hand, the cash option would immediately decrease the prize to $254.1 million. That is not with the taxes applied. It is simply the discount that is always due when you choose the lump sum payout.

Assuming that you have proper control and patience to manage the lump sum and take the $254.1 million, you will pay 24% in federal taxes. That leaves you with $193.1 million, which is still a pretty good sum. When you make your income tax, you have to deduct the tax rate of 37% on amounts over $523,600. You would be left with $121.6 million.

Finally, some US states do not have a state tax, but others do. Imagine that you have a small state tax of 3% to pay, and you can finally enjoy your $118 million from a $370 advertised jackpot.

Over 30 years, that money invested could generate much more than after that same period receiving annuities. Fortunately, you already know the differences and have a real example of how the alternatives affect your total prize.

What Is the Best Type of Payout for Lottery Winners?

The truth is that there is no correct answer if lottery winners should take the lump sum or annuity payout. Our comparison table should suffice to identify if you are more prone to one alternative or the other. In summary, the best payout option is the one that will make you comfortable and in peace, which is how a lottery winner should feel.

How to Identify the Best Option for You?

If understanding the differences and advantages of lump sum and annuity payout was not enough, there is another way of knowing what you should take. You can base your decision on three major pillars that will define if lump sum or annuity payouts work better for you.

Life Expectancy

Annuity prizes offer financial securities for many years, including by giving you enough time to get used to it and adapt your life and routine. If you are young, it is excellent to build your living standards little by little.

On the other hand, older lottery winners might not have as much time to enjoy, and, even if it would be fine to leave the rest of the installments to your heirs, you will probably want to live your life to the fullest. That is when lump-sum payments make more sense,

ROI – Return on Investments

It is important to have a plan for the money when you win the lottery. Not only to avoid surprises and even losing all that money but to understand your ROI (Return on Investments). When you already know how you wish to invest the money, you will know how much income or profit you could get from the money from annuities and from a large lump sum payout.

Debts and Plans

If you have debt, it is ideal to pay it off as soon as possible, and especially not ignore it to enjoy your prize. Depending on how much debt there is, it might not pay off to choose annuities and wait another year for more money to come and pay the debt. It all depends on the interest, of course.

Therefore, consider all the debt that you have and your plans with the money to figure out if the annuities will be enough. If not, you will probably be better off with a lump sum payout.


What Happens After the Lottery Annuity Winner’s Death?
After the winner’s death, the annuities do not cease, and the heirs inherit the right to receive the annual payments.
How to Opt for Annuity or Lump Sum Payouts?
You need to contact the lottery office of your region – or the online lottery site where you have played – to claim the prize and define how you want to receive it.
Can I Change My Mind and Opt for Another Payout Type?
After you have made your choice, you cannot change how you will get paid.
How Many Years Do Annuity Payouts Last?
It depends on the lottery game. Most of them will last for 29 years after the first payment.
Why Are Lump Sum Payouts Smaller Than Annuities?
It is a trade-off for the smaller risk and for not being willing to wait to receive the money over the years.



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