help with annuity rates of return vs. CD returns

Reply #13

thelottery — Tue, 27 Dec 2011 04:48:19 GMT

Just to note, South dakota has a Federal withholding of 28%, instead of the 25% for other states.

Best to check the exact taxes for a state by going to the state's own lottery site, and their tax site.

Reply #12

thelottery — Tue, 27 Dec 2011 04:18:10 GMT

tolerance for risk

It is a gamble. Unless you are the guy who decides what the rate will be... it's a gamble, an educated gamble at best, hoping that you understand an extremely complex game that involves everything.

There are Bump-Up CDs so you have the ability to bump up to a higher rate if the market rates increase... Variable CDs to track the market's interest rate in case it goes up... Fixed CDs to eliminate the risk if rates decrease...

Certain and fixed annuity payments sure s... [ More ]

Reply #11

thelottery — Tue, 27 Dec 2011 03:53:46 GMT

Right, the initial taxes on lottery payments are taxed as lottery taxes - Federal at 25%, and state taxes depend on the specific state.

For Interest Income..

I have only checked a few states which I am personally interested in. All of them tax Interest Income at a set percent. This includes interest from CDs.

It's easy to check... just google:

Interest Income Tax (state you're interested in)

or any other way to find the state tax website. Another keyword to search for is Interest... [ More ]

Reply #10

Longarm — Tue, 27 Dec 2011 01:53:53 GMT

The 25% figure is the initial withholding, not the final tax liability. The final liability depends on the totality of the winner's financial situation. In general, the more income you get in a single year, the more that will fall in the highest bracket.

Also, that's a good point about higher future rates. It's a big risk locking in today's low rates for 26 or 30 years. Of course, if you're getting millions (or hundreds of millions) of dollars, your primary concern should probably be pres... [ More ]

Reply #9

JWBlue — Tue, 27 Dec 2011 01:23:54 GMT

Lottery winnings are not taxed as ordinary income?

I almost 100% sure it is.

Also, I am almost sure that interest income is taxed at the ordinary income rate.

Reply #8

kapla — Mon, 26 Dec 2011 21:34:00 GMT

Should be interesting to see what they say. Also I would bet they leave it open to 'change' in the future so as to be the best for the lottery vs the customer.

Reply #7

thelottery — Mon, 26 Dec 2011 06:10:19 GMT

After reading more, it appears that:

-some annuities have a interest rate that is fixed for the life of the annuity

-some annuities' interest rate is reset annually

-some of the annuities that are reset, are based not on the Fed or Prime rate or other market rate, but instead are based on the insurance companies yeild on their own investment portfolio which can contain bonds and other interest bearing holdings.

Bottom Line - I sent a question to the PA lottery. Having a clear answer... [ More ]

Reply #6

thelottery — Mon, 26 Dec 2011 02:27:30 GMT

Good point. CD rates can change.

This brings up another point:

If the interest rates do rise, then it would be probable that the lottery annuities rates of return would also rise comparably.

- According to the PA lottery website.. The annuities are provided by companies who win the annuity contract. There are several companies trying to get the annuity contracts, so they naturally will offer the most attractive rates... that means their rates will correlate closely with the Fed interest... [ More ]

Reply #5

thelottery — Mon, 26 Dec 2011 01:55:24 GMT

Longarm,:

The Fed tax on lottery prizes seems to be 25% for every state, so that is a set %.

The tax on interest is also a set percent, depending on the state (some states do not tax interest income).

From what I have read, there are no tax brackets for interest income - just flat rates.

Reply #4

savagegoose — Mon, 26 Dec 2011 00:59:15 GMT

theres a dormula to work out present value i saw it on kahn acadamy

http://www.khanacademy.org/video/present-value-2?playlist=Finance

theres 3 vids on the topic this is number 2

Reply #3

kapla — Mon, 26 Dec 2011 00:09:54 GMT

Another factor to consider is 'If CD/fixed rates of return go up in the future'. If you were to LADDER the CDs then as they come due you could be re-investing them at the NEW higher rate of return. At some point these low fixed rates of return need to rise. That would then CRUSH the annuity payments for returns.

Reply #2

Longarm — Sun, 25 Dec 2011 19:17:07 GMT

If you invest the lump-sum, you'd need to pay taxes on your gains/interest.

Are you including the initial taxes on the jackpot? That's one of the bigger considerations. If the full cash value (minus the first payment) is invested in the annuity, there's no tax paid. That leaves a larger amount to start the investment. Also, less of the annual payments will be taxed at the highest rate compared with the full cash value taxed all at once. That's particularly important if the annual payments ar... [ More ]

Reply #1

thelottery — Sat, 24 Dec 2011 05:55:32 GMT

Also - with an annuity, you can be investing a portion of each years payment.

Say you invest $1mil each year into a 1.5% CD.

After 26 years you'd have made $4mil in after-tax interest. In 30 years, it'd be $6mil.

When the annuity is $5mil a year, it's easier to save and invest more.

If $2 mil was invested each year at 1.5%

there would be an extra $9mil from the interest, after-tax, after 26 years. Or $12mil after 30 years, after-tax.

help with annuity rates of return vs. CD returns

thelottery — Sat, 24 Dec 2011 05:00:32 GMT

*Assuming investing at a fixed rate of return* (certificates of deposit, money market, etc)

do the below numbers look right?

Assuming:

the State in question has no lottery prize tax..

And assuming that interest income is taxed at:

10% by the State, and

30% by the Fed

Using an online Compound Interest Calculator, these numbers came up..

The last MegaMillion annuity was 173 while the lumpsum was 130.

That's a return of 33%, over 26 years.

After taxes - That... [ More ]