Cash for Annuity

This site recommends Stone Street Capital for your Structured Settlement needs. Stone Street Capital has been a leader in the specialty finance industry for almost 20 years. In that time they have helped thousands of people receive immediate money for their future payment streams.

If you have ever purchased a lottery ticket, you are probably familiar with that question. Most state lotteries now give the player the option of taking the jackpot in a series of payments, typically 20 years, or taking a reduced jackpot all at once. Is there a tax advantage to taking the payment over a series of years vs. taking it all at once (Cash for Annuity).

The answer really depends on the size of the jackpot. If the jackpot is more than six or seven million per winner, it probably won't make any difference. The principle advantage of the annuity payment plan is that by spreading the income over a number of years you can take full advantage of the lower tax brackets each year.
Since a married couple would reach the maximum tax rate at approximately $326,500 of income, once the jackpot is above that six or seven million, the bulk of the winnings are going to be taxed at maximum rate every year.

The rate of return that is built into the annuity option is probably the biggest factor in determining why the cash for annuity option is better. Most annuity options pay a relatively low rate of return given what you could earn had you invested the reduced cash jackpot.

Finally, don't be fooled by the hype of the "after tax" amount as reported in the media. Depending on the state that the winner lives in, the "after tax" amount reported in the press release is only reduced by the legally required withholding.

In the case of federal income tax, the required withholding is 28% of the winnings, yet the maximum federal tax rate is really 35%. On April 15th, the winner is still going to have to pay in a big tax payment. State income taxes would decrease the actual "after Tax" winnings even further.