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Tuesday Mega Millions Jackpot: Annuity or Lump Sum?

9 Dec 2013

With the Mega Million jackpot on the way to another potential record-breaker, we decided to examine what exactly those numbers mean for the American lottery's lucky winners. Dive in to see how annuity payments are calculated, divided, and taxed, and which option you should opt for when you win this Tuesday's Mega Millions prize: the annuity payment or the lump sum. 

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The jackpot for the upcoming Mega Millions draw is estimated at $344 million in annuities, or a $184 million cash lump sum. This means that when you become a multi-millionaire, you will need to choose between the two. So what exactly is the annuity option, and how are the payments calculated?  

The Annuity Option

The official Mega Millions lottery organization divides the jackpot into 30 payments. The first is received when you come to collect your prize, and the other payments are received once a year for an additional 29 consecutive annual payments.

The money is divided so that each yearly payment is 5% bigger than the previous one. This will make the last payment roughly four times as large as the first payment, which will be about 66.5 times smaller than the reported jackpot. In the case of Tuesday's jackpot, the first payment will be $ 5,177,700 (rounded up), the 15th payment will be $10,251,479, and the last payment will be $21,312,100.

Taxes

So now that you have a general feel for what the numbers are, time to address the silent partner – taxes. Taking the lump sum means you will pay the required tax according to the current tax rates. Choosing to go with annuities means you will be paying taxes annually, and the amount will vary as tax rates change. Choosing between annuities and the lump sum depends in part on what tax changes you forecast for the state or country you live in. Lower future taxes tilt the scales in favor of annuities, while higher future taxes would make the lump sum option more attractive.

Relocating

Some countries offer favourable taxes; some do not tax winnings at all. This does not mean that you should pack up and move when you win the lottery, as most countries have laws in place that require you to pay taxes for any income accrued while being a resident of that country, even if the income has not been paid. In other words, you are likely to be required to pay taxes according to your place of residence at the time of winning the lottery.

Investing

Lastly you should take into account the amount of revenue you expect to see from the big jackpot win . If you expect the win to provide less revenue than you stand to gain from the annuities, you might want to consider collecting annuities instead of taking the cash and investing it yourself.

As always, we highly recommend retaining the services of professional tax attorneys and accountants before approaching the lottery to collect a prize. Having good professional advice is crucial to making the most out of your millions!

If you haven’t yet purchased a ticket for Tuesday’s draw, be sure to get one in time.

We wish you the best of luck!