That's a different approach, and it's just like any other gambling: You should only be willing to spend what you can afford to lose. Meanwhile, if you are lucky enough to win the lottery , financial experts typically advise you to take the lump sum option and invest your winnings in long-term stocks , rather than taking multi-year annuity payments.
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Only six states allow winners to remain anonymous, while three others allow them to collect winnings through an LLC. Most lottery winners opt for a lump sum payment. They want all of the money immediately. That is the main advantage of a lump sum: full and complete access to the funds.
Not only do individuals like that, but their newly acquired giant team of accountants, financial advisors , money managers, and estate lawyers do too—the more assets under management, the better, especially if their compensation is based on a percentage of those assets.
Taking a lump sum could also be the better course if, not to be morbid, the winner isn't likely to live long enough to collect decades of payouts, and has no heirs to be provided for. You may be in a better income tax position if you receive the proceeds over several years via an annuity rather than up front.
Lottery wins are subject to income tax both federal and state, except for the few states that don't tax winnings in the year you receive the money. If you take the lump sum option, the entire sum is subject to income tax that year. However, if you choose the annuity option, the payments would come to you over several decades, and so would their tax bill. Not according to the experts. If you choose the annuity option, the government takes your winnings and invests them for you—most likely in boring, yet highly stable Treasury bonds.
Usually, when you invest, you pay taxes, but when the government invests they do so free of all tax obligations. If the government invests it, you only pay a tax bill once on the annuity checks.
But perhaps the biggest argument for taking the annuity is more intangible—to protect you from yourself. A six-figure windfall is a life-changing event, and not necessarily a good one. Most people are inexperienced at managing such sums to begin with, but even the wisest and coolest of heads could lose perspective, especially given the avalanche of friends, family, and even strangers that descends once the news gets out, pleading or even demanding a share of the spoils.
Academics cite research showing most lottery winners will save only 16 cents of every dollar they win and that one-third of lottery winners go bankrupt. An annuity can help, by literally limiting the funds in your possession. After all, you can't give away, squander, or otherwise mishandle what you don't have. Plus, taking the money over time provides you with a "do-over" card. By receiving a check every year, even if things go badly the first year, you will have many more chances to learn from mistakes, recoup losses, and handle your affairs better.
Inheritance factors are generally free standing but there can be some considerations where lottery inheritance is involved. Taxes are generally withheld from lottery distributions at the time they are paid out. If payments are made in a lump sum, the inheritance can be passed along tax free since inheritance gifts are generally not taxed.
If the payments are still coming in as an annuity, taxes will be withheld. As in all inheritance scenarios some estate taxes may be required if values exceed the exclusion limit. Since lottery winnings push many people into the high net worth category, estate taxes may be a factor. This can be a challenge if the heirs do not have the cash on hand to do so. In some states Powerball will convert annuities to lump sums upon death to help better manage any tax burdens.
If you ever do win the lottery, you will want to work with your financial advisor, tax attorney, and certified public accountant to determine which option is best for you—taking the winnings all at once or in annuitized payments over decades. Many people see purchasing lottery tickets as a low-risk investment. The risk-to-reward ratio is certainly appealing, even if the odds of winning are remarkably small. Is it better then, to play the lottery or invest the funds? There is no universally correct answer.
Much of it depends on what money is being spent. If it is needed for retirement or the kids' college, it may make more sense to invest—a payoff is more certain down the road, even if it doesn't amount to a sexy six-figure check. If, however, the money is tagged for entertainment, and you would have spent it seeing the latest movie anyway, it might be fun to take the chance. Keeping in mind, of course, that you are more likely to die from a snake bite than to ever collect.
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Think of how a basketball team, trailing late in the game, will begin fouling its opponents. Or how a political candidate, behind with two weeks until the election, will go on the attack, hoping to shake up the campaign. These ploys harm your expected value. But by heightening the randomness, you boost your chances at winning.
Yes, on average, you lose. Hey, look at that fresh-faced young lottery player! Does the sight fill you with nostalgia for your own youth? Nobody likes being hit up for money, even by the friendly neighborhood government. States have tried taxing all sorts of things earnings, retail, real estate, gifts, inheritance, cigarettes , and none of it brings their citizens any special joy.
Then, in the s and s, these governments stumbled upon an ancient mind trick. Is there an innocent explanation? To be fair, public lotteries are less corruption-prone than private ones. Why pay out so little in winnings? And why print gaudy tickets that resemble nightclub fliers spliced with Monster Energy drinks? The explanation is obvious: lotteries are for revenue, period.
Tax dollars are fungible, and lottery revenue is generally offset, dollar for dollar, by cuts in spending from other sources. So why do earmarks — and state lotteries, for that matter — endure? Now, allow me to introduce you to a starry-eyed hopeful, who holds as special a place in my heart as the lottery holds in theirs: the Dreamer. With a lottery ticket in hand, your imagination can go romping through a future of wealth and glory, champagne and caviar, stadium skyboxes and funny-shaped two-seater cars.
Never mind that winning a lottery jackpot tends to make people less happy, a trend well documented by psychologists. Daydreaming about that jackpot affords a blissful few minutes while driving your disappointing regular-shaped car. The prime rule of fantasy is that the top prize must be enough to change your life, transporting you into the next socioeconomic stratum.
By contrast, comfortable middle-class earners prefer games with multimillion-dollar jackpots —enough kindling for a proper daydream. Forget the cash prizes and all that probability mumbo-jumbo. The chance to rub a quarter across some cardboard is winnings enough. His blog is Math with Bad Drawings.
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Reddit Pocket Flipboard Email. Finally, Step No. When life is hard, we roll the dice. Turn tax paying into a game, and people will line up down the street to play. This essay was adapted from the book Math with Bad Drawings. Next Up In First Person. Delivered Fridays. Thanks for signing up!
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