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Should you take the lump sum or annual payments?

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If you win the lotto, you may give some of your enormous loot to close family and friends but you’ll also have to fork some over to the IRS. Buzz60’s Mercer Morrison has the story
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Powerball players are anxiously awaiting Wednesday night’s drawing for a jackpot worth $750 million.

There hasn’t been a Powerball winner since December, and the huge jackpot has lotto players across the country daydreaming of the many ways they’d spend the big bucks.

But the first decision a winner must make is how to take the jackpot, either choosing the cash lump sum of $465.5 million before taxes, or 30 annuity payments that eventually add up to the $750 million jackpot.

Which one is better than the other, moneywise? Let’s break it down:

ANNUITY: The installments are paid out as one immediate payment followed by 29 annual payments. Each payment is 5 percent larger than the prior one.

Pros: The biggest allure of the annuity is having a guaranteed income stream for the next 30 years, which largely insures you never run out of money. For conservative types or those who can’t suppress their spending urges, this may offer peace of mind.

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Cons: There are risks. It’s possible the entity making the payout over the 30 years could run out of money. You also could die before enjoying all your winnings. Tax rates, which are the lowest in decades for the top tax brackets, could increase over the next 30 years, and more of your winnings then would go to the government than into your pocket.

There is also the issue of estate taxes, says Leon LaBrecque, managing partner of LJPR Financial Advisors. If you pass away before all installments are paid, your estate with undistributed installments would be taxed at 40 percent of anything above $22 million. “The estate would have to pay the estate taxes, even though the installments haven’t arrived,” he said.

LUMP SUM: The one-time cash payout is $465.5 million. The advertised $750 million jackpot is the total if you choose the annuity payments option.

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Pros: Taxes favor taking the lump sum because rates are so low right now. In 25 years, who knows? Financial pros also point out that with a smart investment strategy, you could make more money off the lump sum than the eventual full payout of $750 million. The key is to calculate how much you plan to spend immediately from the cash payout before making any calculations.

“To invest better you need to not only choose a good, low-cost, diversified portfolio, but you will also need to make sure you control your emotions in good markets and bad,” says Charles Weeks, founder of Barrister Wealth Management, LLC.

Cons: The main concern is that winners with little self-control could spend away their winnings, especially as family, friends and charities look for handouts. There are plenty of stories of celebrities, professional athletes and other lottery winners squandering their newfound wealth and ended up in bankruptcy court.

But the sheer size of this jackpot makes it hard for even the most ambitious spendthrift to blow all their winnings.

“It’s all about scale,” says Douglas Boneparth, president of Bone Fide Wealth in New York. “If it’s a smaller amount, the risk is proportionally higher.” You can make a lot of mistakes with hundreds of millions of dollars and still come out ahead.

The verdict? Take the lump sum.

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If you are lucky enough to snag the $1.6 billion Mega Millions jackpot up for grabs Tuesday night there are a few things you need do immediately, according to an attorney who has advised winners of various sizes. (Oct. 23)
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Read or Share this story: https://www.usatoday.com/story/money/2019/03/27/powerball-2019-should-you-take-lump-sum-annual-payments/3289575002/


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