How to choose the right lottery jackpot payout so you don't get caught out
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A while back my wife and I visited a mansion. It is the home of my daughter's partner's parents in Australia where we're visiting, pre-Covid, at the time.
And it's an impressive home, all marble floors and large rooms.
Looks a bit like the example photo above.
But the father's business has slowed down and they may have to sell it to downsize.
So here's a thought for you...
If your lottery game offered a jackpot choice of a lump sum or X dollars a month, which option would you take?
It's tempting to think that a regular monthly income for life would solve the problem for keeping up the mortgage. Our in-laws could keep the house and live on the income.
But as a winner, if you don't have a home yet, you'll need a deposit. And monthly payments from the lottery won't give you that.
So choose the lump sum cash advance.
Then you can buy a home and deposit the rest of the funds into a bank account which pays out interest.
But be aware that the amount you get could be less than the advertised jackpot, for a couple of reasons:
Most USA games show an annuity payout in their jackpot figures. That means it is the total amount the organizers pay the winners over an extended period in installments.
Often these are annual payouts spread over 20 or 25 years and they make up the large jackpot totals you see in many games.
If you choose a cash sum, this amount is reduced considerably.
For example, for the $640 million Mega Millions game drawn 30 March 2012, the cash lump sum payout was $474 million.
And this amount is before tax. There are several taxes that are withdrawn from the winning amount as well.
In the USA, all lottery winnings are subject to Federal and some local taxes. The IRS takes a 25% withholding tax from any wins over $5,000.
But of course large winners find themselves in a higher tax bracket too, so this tax amount can rise substantially and make the final figure much lower.
In Europe jackpots are usually tax-free, and the jackpots are paid in a lump sum so there's little to worry about there. All the costs are taken out and the advertised jackpot is the final amount.
So if you are a lottery winner in the USA, what should you do to get the most value from your win?
Many winners opt for the cash advance. Even though it's a lower amount, there is a definite advantage on having the money in your bank as a final figure.
It allows many people to pay off their debts and make large purchases such as houses and investments.
So choose the lump sum cash advance.
READ MORE: Here's some more information on how to choose your best payout option.
