The Mega Millions is a jackpot lottery that is played in about 40 states in the United States. If you are declared one of the lucky winners of the Mega Millions lottery, you will have to manage an unexpected fortune. You will have a choice between two ways of receiving the jackpot prize: an annuity or a lump sum payment.
The Mega Millions annuity comprises one immediate payment and 29 annual payments. For a typical jackpot prize of $100 million, the immediate payment will be $1.5 million, while the annual payments would grow to about $6.2 million each year for 29 years. Each annuity payment is 5% bigger than the previous payment to protect the winner's lifestyle and purchasing power from inflation.
How does the Mega Millions lottery payout work?
The Mega Millions lottery is a game of chance, where someone has to walk away with the jackpot prize. This lottery is played in more than 40 states, and each state has its own rules. Typically, you must claim winnings within the state where the ticket was purchased. Generally, the lottery may have only one winner, while in some cases, there may be multiple winners sharing the final prize.
Mega Millions jackpot winners have two payment options i.e. annuity or cash. If the winner chooses the cash option, they will receive a lump sum payment, but the amount will be less than the publicized jackpot amount due to tax withholding. With the annuity option, winners receive 30 payments spread over 29 years. The annuity payment is 5% higher than the previous annuity to protect the winner's purchasing power in periods of inflation.
The choice between the cash and annuity options depends on the winner's preferences. The cash option means that you control the monies immediately, and you can choose your investment plans based on your preferences and risk profile. On the other hand, an annuity gives you a steady stream of income, and you will get the full listed jackpot amount instead of the reduced lump sum total.
How much is the Mega Millions annuity payout?
The Mega Millions jackpot amount varies each year. The January 13 2023 Mega Millions jackpot amounted to $1.35 billion, the second-largest jackpot in the lottery’s history. The estimated value of annuity payments over 30 years is $1.35 billion, which averages $45 million per year.
The Mega Millions annuity comprises one immediate payment and 29 annual payments, and the payouts are made on an annual basis. Each annuity payment is 5% bigger than the previous one to protect the winner's purchasing power from inflation. Income taxes for the annuity option are deferred until when payouts are received. However, you will owe taxes on the first immediate payout, but you won't owe further taxes until you receive the annual payout in subsequent years.
How much is the lump sum payout?
If you win the lottery, you can choose the lump sum option, and get paid an amount equal to the jackpot prize pool. For the January 13 jackpot, the lump sum payment is $724.6 million before taxes. Typically, the lump sum payment is worth about 50% of the total winnings, and it is usually lower than the annuity option.
Generally, federal income taxes are due immediately after the winner receives the cash payout. If you live in a state with state income taxes, you could pay additional state and local income taxes from the lottery payout. The IRS will withhold 24% of the payment right away, and the winner will be expected to pay the remaining taxes when filing the tax return for the year. After deducting both the federal and state income taxes, the take-home cash payout totals $404.7 million.
Why choose the Mega Millions annuity option
An annuity option is a good option if you want to maintain your lifestyle and ensure you don't spend all your winnings at once. The 30 annual payouts provide long-term financial security since the annuity payments are guaranteed over a long period.
If the winner dies before receiving all the annuity payments, payments will still be paid to the named beneficiary or the deceased’s estate. The estate can also request all remaining annuities to be paid immediately so that any inheritance taxes owed are paid immediately to avoid incurring penalties.
Why choose the Mega Millions lump sum option
The cash option allows lottery winners to pay their federal and state taxes immediately to avoid long-term tax implications. The IRS withholds 24% of the winnings for federal income taxes, and the winner must pay any additional taxes when filing the annual tax return for the year.
Additionally, receiving the jackpot prize as a lump sum allows the winner to make large investments that will earn a higher return than if the lottery winnings are spread over 30 years.
However, with many stories of winners who wasted their newfound fortune and ended up worse than they were before the lottery, lottery winners should not make any decisions without getting advice from financial, tax, and legal advisors. Investing a chunk of the money assures you higher returns in subsequent years.
Are Mega Millions annuity payments transferable?
Jackpot winners who choose the lump sum cash option can determine how their winnings are distributed when they die. However, different rules apply to annuity payments, where the winner receives annuity payments over 30 years.
Depending on the rules of your state, you may be allowed to choose a beneficiary to receive the annuity payments after you die. However, most states only allow winners to name only one beneficiary, making it difficult to spread the payments to multiple beneficiaries. If your state only limits the number of beneficiaries to one, you can forgo this option and choose the payments to go to your estate.
If you do not choose a beneficiary, the annuity payments will be paid to your estate for distribution to eligible heirs. However, if you did not leave a will, the state will distribute the annuity payments based on the state rules.
