TaxConnections Picture - Lottery BallsThe most frequently asked questions from lottery winners and those who just dream about being a lottery winner is:

“Should I take a lump-sum or installments?”

Take the installments!

 

Despite everyone telling you to take the lump-sum. Your heirs will receive the balance if you die before collecting all the payments and at least 65% of your lump-sum amount will be gone within the first year due to discounting and taxes.

A lump-sum winning will typically get reduced by 45% or more for the time value of money (acceleration by 20 plus years) 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.

Installment collections will generally only be subjected to the federal tax hit (depending on state rules) and the taxes are paid over the collection period. In effect, each payment includes a layer of interest earning and once the amounts are received, the recipient is free to make their own investment decision on those funds. Read More