Winning was a happy time for $21 Million winner Wayne O’Keefe (right), but watch those hidden costs! PHOTO: CA Lottery
It’s been a happy day for you. You’re tired after the all-night celebrations, but you are about to collect your enormous check from the lottery headquarters.
You’re looking forward to a life free of worry.
The meeting with the smiling lottery official goes well until he asks you a potentially heart-stopping question:
“Do you want it all in cash, or as a yearly payout?”
You are surprised but not worried. “Hey, all cash please!”
Ding! That’s the sound of your win being cut in half.
That’s because the cash value of many lottery prizes is based on different rules. In the USA the $100 million you see advertised on the lottery sites often drops to as low as $50 million for the all cash redemption.
The prize gets even smaller when there are many winners involved.
If you are a Mega Millions jackpot winner, for example, their website’s FAQ sets out the annuity option pays annual payments over a 26-year period.
For every $1,000,000 in the jackpot, Mega Millions winners will receive approximately $38,500 per year before taxes.
For the Cash option, winners get a one-time, lump-sum payment that is equal to all the cash in the Mega Millions jackpot prize pool.
Confused, you take the lottery official’s advice and see a financial planner who specializes in lottery winning.
But financial planners don’t come cheap.
She has bad news for you: “If you take the yearly payout, you’ll get more over the years than the all-cash option,” she says.
At last … more is better, you think.
“With the cash option, the state has to withhold 25% for federal and income taxes,” she adds. “And you have to pay that straight away.”