lump sum or annuity? | Vegas Message Board
Discussion in 'Non-Vegas Chat' started by Gomar, May 11, 2012.
I am confused by choice of lump sum or annuity.
"A lump-sum winning will typically get reduced by 45% or more for the time value of money (acceleration by
2o+ years)"
ok, so say jackpot is $100m, lump sum is 60% of it, so it's $60m, correct? Fine so far.
"and then the net amount is further reduced by approximately 35% or more for taxes; leaving a net amount of 35% or less of the gross winnings."
ok, so the taxes are taken off the $60m not the jp amount of $100m, right? Leaving $40m. Thus, you take home %40 of jackpot prize. If you put in the bank $40m, you get back in 26 years from interest rate and investments the same amount you lost as you took the lump sum.
"Installment collections will only generally only be subjected to the federal tax hit (depending on state rules) and the taxes are paid over the collection period."
huh? So if I choose 26 installments then do I get the entire jackpot of $100m or not? Do I still pay %35 tax on the entire $100m only once, or the yearly installments? Thus, I will get $65m in 26 years if taking annuity
instead of $40m lump sum.
From my understanding is that if the jackpot is $100 and you take the lump sum you get $60 and the $40 is the taxes. You don't get double taxed and have to pay on the $60. The $60 is what you get to keep.
Like I said, this is my understanding. I would be happy if I could say I am telling you from experience but unfortunately not.
If you're talking about jackpots that pay an annuity, then the stated jackpot is the total amount paid over the years, in this case payable over 26 years. Apparently, they let you choose to get a lump sum instead, in which case you get 60% of the amount (well, actually you get 55% or less, according to the statement above, but let's use 60% just to be consistent with the other folks).
Soooooooo...:
(a) if you choose the annuity, you get $100m divided by 26, for each of the 26 years.. Each year, you pay taxes. If that figure is 35%, each year you get $100m divided by 26, then further reduced by 35%.
(b) if you choose the lump sum, you get $100m times 60% = $60m. That figure is then subject to taxes, so you get $60m minus 35%
Here is an article that came out during the lotto craziness a couple months ago. Should answer most of your questions, and very interesting to read none-the-less!
Since you don't know what the tax rates will be in the future, the best move would be to take a lump sum now and be done with income taxes on the win and only face capital gains on your investments for the future.
it's pretty simple, really. the lump sum is always less than the annuity. this is because the lotto doesn't have all of the money, they are going to invest it in an annuity that pays you $X/year for 30 years or whatever. so when you take the lump sum you just get the total of the money they actually have at that time.
taxes are completely separate. the difference in money between the lump sum and the annuity is not the taxes paid as one poster suggested. you are taxed all at once on the lump sum (because you get it all at once). you are taxed every year on the annuity as much as you get in that year.
I think that up to a point, maybe around the $15-20M mark, you should always take the lump sum over the annuity because there is more you can do with the lump sum than you can with an annuity at that point.
IE: if it was a $10,000,000 prize and your choice was $6,000,000 now or $400,000 a year for the next 25 year...
With the $400K you could pretty much retire and live well off that for the duration of the annuity but what you can really do with the money is somewhat limited... if you took the $6M instead it opens up a lot more opportunities for things like investing or buying a business.
But also depends on the person: if you aren't the best at managing money or have a problem saying "no" to the thousands of people that will come to you with their hand out then you should take the annuity otherwise you run the risk of blowing through it all and a couple of years down the road having nothing to show for it.
In the end I don't think the original question really needs answering: presumably if somebody won something as big as $100M they would at least have enough sense to consult with a financial adviser or two... and they should be able to pretty much explain it in black and white exactly what it means if you take one option over the other, how much taxes you have to pay, possible ways to avoid paying taxes, strategies for spending and giving your money away, etc.
Considering %0.03 interest rate on $40m is $1.2m, I wouldnt worry about taxes or blowing it all.
BTW, ifcourse, there is prestige and being able to say you have $40m instead of just $2.5m. You could move out of the high tax rate U.S. and to low or no tax countries like Canada, Ireland, Australia, etc.
Considering %0.03 interest rate on $40m is $1.2m
I assume you are actually thinking of a full 3% , which is a multiplier of .03
.03% would be a multiplier of .0003 , and would yield much smaller results.
Why risk that the money that the other party has will be there for the next 20 years?
That's a VERY good point !!! All you have to do is look at my home state of Illinois, and how poorly they manage their money.
[/QUOTE] You could move out of the high tax rate U.S. and to low or no tax countries like Canada, Ireland, Australia, etc.[/QUOTE]
Wow, this so isn't true. I have lived in both Australia and Ireland and the top income tax rate was 50% when I lived there! This is significantly higher than the 35% US tax rate. Unless you were referring to capital gains?
I guess I'm in the minority as I would take the annuity. Too much money brings too much stress and problems. I have no problem retiring with 400-500K per year.
You can still invest in real estate, travel and pursue philanthropy with high six figures per year. But most importantly you stay under the radar to most.
If I receive annually $250k, I can save/invest $100k atleast. Surely, I wont spend entire $ each and every year for 26 years. Also, if the state or the lottery goes belly up and cant payout, then surely all banks, stocks, bonds, Tbills, mutual funds, CDs, etc. will do so as well.
However, there is less risk of a guaranteed state return of %3 on annuity, but a huge risk in investing by yourself.
I would assume that any annuity would be backed by an insurance company somehow. I wouldn't necessarily worry about the state messing it up the potential payout because they shouldn't have access to the money.But then again, I am not sure as the state farmed out lottery operations to a private firm and there have been issues with people getting paid correctly. But if the fear is blowing the money, I would figure that there is a way to set up something on my own to protect the money long term. Folks have been doing things like that successfully for ages. In the current political environment, I just don't think that it's a smart move to have large sums of money paid out over time when they want to raise taxes at the top.
You could move out of the high tax rate U.S. and to low or no tax countries like Canada, Ireland, Australia, etc.
I'm with Kiwiboy1 - either this is a joke or there's some serious misconceptions going on.
Being from Europe, I always find it a bit amusing to see Americans complaining about how high their taxes are - which may or may not be true but they're lower than in practically every other developed country.
If you were to have an income of millions (as in a lottery), your tax bracket in Ireland would be 41%, 29% in Canada (the country doesn't tax domestic lottery winnings, but does tax foreigh ones), and for Australia 45%+1.5% Medicare Levy+1% Flood Levy. So of those, only in Canada might you keep more of your winnings.
There's a reason why the tax dodgers tend to go to obscure places rather than developed Western countries - they're about the only ones where you can shelter much of your income these days (with some exceptions like Monaco, though arguably that's a pretty unsual and obscure place as well).
Now that PB is $100m, and I have 2 tickets, which I am sure are winners
let me state my choice.
Yes, $400k is alot, it's $33k+ per month. Average salary is $35k/year. Can I spend $400k every year? I sure hope not! I will invest half; and half on a house, trips, car, new TV, new PC, etc. Then, next year I gets me yet another $400k, and the year after that, for 25 years!
Thus, annuity and a guaranteed $10m is the better choice vs. lower lump sum, risking wasting it all, bad investments, etc.
Less money will keep spending under control.
for those that want the annuity - why not take the lump sum and buy your own annunities - spread the risk around various companies.
and keep a lump sum to splash out1!
I think most people will take the lump sum... but at the same time I also think most people:
- most people won't know what to do with all that money
- most people won't seek out proper financial advice
- most people won't be able to say no to all the people (friends, family, charity, strangers) that come with their hand out or the level of guilt they will pile on you until you give them money
- most people won't realize how much they are spending/giving away until it is too late or almost too late