Written by Lindsey Crossmier, Featuring Asher Rubinstein, Partner at Gallet Dreyer & Berkey, LLP.

Winning the lottery would be a huge deal for anyone. After the initial shock, you’ll be faced with a decision — how to receive the funds. You can receive your lottery winnings as a lump-sum cash option or as a stream of annuity payments. Out of the seven largest Powerball and Mega Millions payouts in recent years, 100% of winners who disclosed their payout type chose the lump sum option. Some experts we interviewed for this article consider the lump sum option a mistake. Others think the contrary.

It’s critical to understand that both payout options have different tax rules (federal and state), inheritance rights and overall impact on your financial wellness. But while there’s no single best option, there are pros and cons for each that may influence your decision.

Key Takeaways

• If you choose the lump-sum option, your payout will be 40% to 50% less than the original lottery payout amount. The annuity payout gives you the full lottery payout amount.
• Winners who choose a lump sum payout will owe 100% of state and federal taxes due the year they receive the winnings. The annuity breaks up taxes due with each scheduled payment.
• The annuity payout offers long-term financial protection and minimizes taxes. The lump sum provides immediate financial relief, but results in lower overall earnings and high taxation within the first year.

Lottery Payout Options

The two main lottery payout options are a one-time lump sum payment and an annuity, which is 20 to 30 payments over the course of several years. To help you understand each lottery payment option, we consulted three experts: a certified annuity expert, a certified public accountant and a legal attorney.

Two experts weighed in on the pitfalls of choosing the lump sum payout option — you face higher taxes and an overall deduction of earnings. The third expert highlighted the flexibility and control the lump sum offers.

Certified Annuity Expert’s Take

“When considering your payout options, don’t forget about the tax burden of your winnings. Lottery winners are sometimes surprised at how little of their winnings are left after taxes because receiving all the income at once pushes them into a much higher tax bracket than they were in before. If you opt to receive your winnings as annuity payments, you’ll spread out the income you earn, and therefore the tax liability, over a longer period of time.”

Jennifer Schell, Certified Annuity Specialist and Financial Writer, Annuity.Org

Certified Public Accountant’s Take

“From a tax perspective, we strongly encourage the winner to evaluate the installment [annuity] option before just claiming the upfront prize. Many lottery winners elect the lump-sum option for various reasons. […] If a lump sum is taken, the winners typically take a permanent net-present-value haircut of 30% or more and pay 100% of the tax in the first year. Many times, when the installment [annuity] option is taken, the winner receives the full advertised winnings.

Jennifer Kohlbacher, Certified Public Accountant and Director, Mariner Wealth Advisors

Attorney’s Take

“From a planning perspective — meaning taking into account tax planning, estate planning and asset protection — it makes more sense to take a lump sum rather than a prolonged payout. A lump sum allows you to take control over the entirety of the winning. You are free to plan ahead, set up trusts, pursue asset protection and minimize taxation over the lump sum rather than dealing with installments. For example, funding a trust annually versus funding a trust once and knowing that the funds are secure.”

Asher Rubinstein, Trusts and estates, tax and asset protection attorney, Gallet Dreyer & Berkey LLP

Annuity vs. Lump Sum Lottery Payouts

Our table highlights the main differences between annuity and lump sum lottery payouts.

How Annuity Payments Work

The most popular lotteries, Mega Millions and Powerball, are paid in 30 annual payments. Each year, your annual payment would increase by 5% to account for inflation.

You may be able to sell your annuity payments for a lump sum if you change your mind down the line. Some companies, such as financial services firm JG Wentworth, allow you to sell a portion of your annuity payments. This process is subject to court approval and there may be limitations depending on which state you live in.

Lump Sum Payouts Explained

With the lump sum payout, you receive one single payout, which is generally 40% to 50% less than the advertised winning amount. For example, in 2023, the $1.765 billion Powerball lottery was only worth $774.1 million when collected as a lump sum.

And that’s before taxes, so the winner received even less. With the lump sum, you owe 100% of taxes within the year of collecting the winnings. If the winner chose the annuity option, they would have received the full $1.765 billion, minus the annual taxes.

Largest Powerball and Mega Millions Payouts

Below are the largest Powerball and Mega Millions payouts in recent years, along with the winner’s information. While most didn’t advertise the payout type, those who did chose the lump sum option.

Source: NYTimes

Tax Implications of Lottery Winnings

Both the lump sum and annuity payout face federal and state taxes when applicable. The main difference is the lump sum requires you to pay all taxes upfront with your one payment, while the annuity spreads out your taxes over years of payments.

Federal and State Taxes

Federal taxes for lottery winnings is 24% of all winnings, which is withheld by the lottery agency.

State taxes for lottery winnings vary depending on which state you live in. New York is the most expensive state for lottery winners, with an 8.82% state tax. North Dakota charges the least at 2.9%. Most states fall within the 4% to 6% range.

The following states don’t charge any state income taxes on lottery winnings:

• California
• Florida
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming
• Hawaii
• Alaska
• Nevada
• Utah
• Mississippi
• Alabama
• Delaware

Source: World Population Review

Strategies for Minimizing Taxes

There are several solutions to minimize your taxes, especially if you’re leaning toward a lump sum instead of an annuity.

• Set up a trust: A trust can help reduce your estate taxes in the future.
• Open an individual retirement account: An IRA can help reduce your taxable earnings as long as you follow contribution limit rules accordingly.
• Gifts and charitable donations: Gift a portion of your winnings to family or a charitable organization to reduce your taxes.

To make an informed decision, consider reaching out to a tax professional before trying any of these strategies.

Factors To Consider When Choosing a Lottery Payout

Your current financial situation should be a priority when choosing a lottery payout type. If you’re deep in debt and have urgent financial matters to attend to, you may find the lump sum to be a better fit than the annuity.

However, there are other factors to consider when choosing a lottery payout type, such as:

• Your age and life expectancy: Lottery annuities usually take 30 years to fully pay. If you’re older or have an illness, you may want to consider the lump sum. If you’re younger and healthy, you could benefit from the larger winnings of the annuity payout.
• Future financial goals and lifestyle preference: Say you have a bucket list to visit 30 countries within five years. That may not be possible if you choose the annuity payout. If flexibility is more of a priority than stability, you may prefer the lump sum. If you can wait to receive the full payout, an annuity could fit your lifestyle goals.
• Risk tolerance and investment knowledge: Those who risk running through funds quickly may want to consider the annuity option. You’ll have annually paced deposits that a seasoned investor can help you manage.

How Much Is a Lottery Annuity Actually Worth?

Unlike the lump sum option, a lottery annuity is worth the amount advertised, minus any taxes. Typically, the lottery agency will withhold 24% of any lottery winnings of more than $5,000 for federal taxes. You’ll also need to pay state taxes if your state charges them. The state tax amount varies by state.

Let’s say you won $1.5 million and chose the annuity payout. You’d owe $260,000 in federal taxes, which is 24% of total winnings. In this example, you live in North Dakota for state tax purposes. It would then cost you $43,500 in state taxes, which is 2.9% of the total winnings.

This means your $1.5 million lottery annuity would be worth $1,196,500 after taxes. This would be sent to you in annual payments, roughly equaling $40,000 each year.

If you choose the lump sum option, your overall payout will be 40% to 50% less than the original lottery payout amount. You’ll also still owe state taxes and the 24% federal tax.

Claiming Your Lottery Payout

You’re not done once you decide how you want your lottery winnings paid out. You must follow the claiming process while maintaining your privacy.

The Claiming Process

The lottery prize winnings claiming process varies depending on which state you live in and how much you won. For example, in Florida, those winning more than $1 million must fill out a claim form and collect winnings at the Florida Lottery Headquarters. In California, you’ll need to fill out a claim form and pick up your winnings at your local California Lottery District Office.

Before claiming, you must decide if you want the annuity or lump sum option. In some states, if you don’t choose an option within 60 days, you’ll automatically get the annuity payout.

You’ll need the following documents to claim your winnings:

• Identification card, drivers license or passport
• Copy or photo of your completed claim form
• Photo of front and back of your winning lottery ticket

If you’re collecting the winnings for a group, you’ll need the documents for other party members as well.

Once all lottery claiming processes have been squared away, your money’s arrival depends on what payout method you chose. With a lump sum lottery payout over $250,000 from Mega Millions or Powerball, you should receive funds within 15 days after the drawing date. However, it could take longer depending on which state you live in. According to the California Lottery Handbook, if you opt to receive a check, the lump sum payment could take six to eight weeks from your claim date.

With an annuity payout, if your payment is under $250,000 you can receive funds within the same business day as long as forms are completed correctly and you have all required documentation. After that, you’ll receive the rest of your annual annuity payments within 20 to 30 years.

Maintaining Privacy and Security

If you can, it’s in your best interest to remain anonymous as a lottery winner. You can create a blind trust or create a legal entity to claim the winnings. For example, one Mega Millions jackpot winner from Florida named the company Saltines Holdings LLC as the winner as a method to conceal their identity.

Try to remain unnamed and seek legal advice to retain privacy. You typically have 90 days after winning before your information is released to the public. Take those 90 days to come up with a plan to remain anonymous. Some states don’t release your personal information at all.

States that allow you to remain anonymous if you win the lottery are:

• Delaware
• Mississippi
• South Carolina
• Montana
• New Jersey
• Wyoming
• Kansas
• Mayland
• North Dakota
• Minnesota (if winnings are over $10,000)
• Illinois (if winnings are over $250,000)
• Texas (if winnings are over $1 million)
• West Virginia (if winnings are over $1 million)
• Virginia (if winnings are over $10 million)

The Bottom Line

While winning the lottery is a happy surprise, the payout type is a serious decision that should not be taken lightly. The lump sum offers immediate financial relief with a large tax burden. The annuity offers multiple payments over years, maximizing your earnings and lowering your taxes. Consider speaking with a licensed financial advisor before choosing your payout type to make an informed financial decision.