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Why Do You Think Lottery Winners Always Take The Cash Option?

Topic closed. 62 replies. Last post 3 years ago by Win$500Quick.

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Jill34786's avatar - Lottery-006.jpg
Windermere, FL/Franklin, TN
United States
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March 1, 2007
843 Posts
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Posted: February 14, 2014, 12:22 pm - IP Logged

Looks pretty straight forward to me.

Jill what you forgot to mention was, in THIS country between 1944-1963, the top earner's income tax rate was at 91-92%
from 1964-80 it was between 70-77%....Only since the start of the Reagan years has this gone down below 50%.

That would have been "just lovely" to have happened...P***ed

CDana, Actually I have mentioned those historical rates in past post but elected to use a rate that was currently in effect at the present time(75% in France).

Most of those who doubt that the top tier tax rate will never go back to those historical levels, even the 70% rate from the early 1980's are clueless and have either too much trust or dependency in Government. 

 

In times of crisis, the Government will look at every means possible in order to increase revenue. Taxation is by far the easiest method as a balanced budget is not part of their vocabulary.

** Some people fulfill their dreams by receiving entitlements from the Government while others wake up and work hard for it! **

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    NY
    United States
    Member #23835
    October 16, 2005
    3501 Posts
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    Posted: February 14, 2014, 7:37 pm - IP Logged

    "You realize that a wealth tax, whether it's a one time thing or an annual tax, will take more from a lump sum than from the annuity payments, right?"

     

    That is a rather strange question. I will attempt to be as simplistic as possible so I don't confuse you.

    Lump sum amounts are always much larger than an annuity payment that is spread out over 30 years.

    An additional tax whether it is a 3.8% Obamacare tax or 1.5% annual wealth tax (currently assessed in France) will always be a larger on a lumps sum amount.

    If you are shopping for a new vehicle and one of them is $300,000 while the other one cost $20,000, the tax bill for the more expensive car will be substantially higher. Even if you purchase the $300k vehicle in a state that has a lower sales tax rate like 4% and compare that to the cost of buying a $20k car in a different state with a higher sales tax of 10%, bottom line it will cost you more in sales tax by purchasing the more expensive vehicle. 

    I do not want to squash your endorsement of annuity payments but if the top tier income tax rate rises to say 75%(rate currently inplemented in France), then the after tax income of the annuity will as a whole be substantially less than the lump sum amount that is taxed at the current top rate of 39.6%.

    I hope this explanation hasn't confused you. If need be, I can elaborate further on why larger amounts of money/income have a higher tax bill than much smaller ones.

    I'll try to keep this simple since you're already confused.

    The lump sum is less than the annuity payments, because it doesn't include the interest earned by the annuity. A one time asset tax would be based on the entirety of the lump sum, but only the portion of the annuity that has already been received. An annual asset tax would tax the lump sum over and over, but would still only tax the portion of the annuity that had been received to date. That means that the tax would take more from the lump sum than from the annuity payments, even though the lump sum will be less than the annuity.

    I asked because you're arguing that the possibility of increased taxes, including an asset tax, are arguments in favor of the lump sum. The reality is that the possibility of an asset tax favors taking the annuity.

      sully16's avatar - sharan
      Ringleader
      Michigan
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      Posted: February 14, 2014, 8:00 pm - IP Logged

      CDana, Actually I have mentioned those historical rates in past post but elected to use a rate that was currently in effect at the present time(75% in France).

      Most of those who doubt that the top tier tax rate will never go back to those historical levels, even the 70% rate from the early 1980's are clueless and have either too much trust or dependency in Government. 

       

      In times of crisis, the Government will look at every means possible in order to increase revenue. Taxation is by far the easiest method as a balanced budget is not part of their vocabulary.

      I agree, 100 percent

       HyperBe Happy.

        Jill34786's avatar - Lottery-006.jpg
        Windermere, FL/Franklin, TN
        United States
        Member #50210
        March 1, 2007
        843 Posts
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        Posted: February 15, 2014, 11:00 am - IP Logged

        I'll try to keep this simple since you're already confused.

        The lump sum is less than the annuity payments, because it doesn't include the interest earned by the annuity. A one time asset tax would be based on the entirety of the lump sum, but only the portion of the annuity that has already been received. An annual asset tax would tax the lump sum over and over, but would still only tax the portion of the annuity that had been received to date. That means that the tax would take more from the lump sum than from the annuity payments, even though the lump sum will be less than the annuity.

        I asked because you're arguing that the possibility of increased taxes, including an asset tax, are arguments in favor of the lump sum. The reality is that the possibility of an asset tax favors taking the annuity.

        Confused? It seems you are the one who doesn't understand basic arithmetic. The annual interest earned on both PB and MM jackpot annuities is just a tad over 2%. Any competent investor or firm can and should easily double those returns.

        Lets say in five years our Government follows in the footsteps of socialist France and implements their 1.5% annual wealth tax along with the top tier tax rate of 75%. Without factoring any potential investment gains from the lump sum, the total net will far exceed what anyone would get from the annuity over it's 30-year payment schedule.

        In your weak attempt at legitimizing taking the annuity by only factoring in an annual wealth tax and NOT an increase in Federal tax, you don't realize that by taking the lump sum there is a good chance that the gains on investment will outweigh a 1.5% annual wealth tax or the 3.8% Obamacare tax.

        Teddi had referred in an earlier post that the lump sum would not be beneficial IF that money wasn't given a chance to grow through investments and only kept in a low interest bearing bank account (which currently returns less than 1%). That is the only scenario outside of an age issue in which the annuity would be the better choice   

        Do yourself a favor and go talk to seasoned tax professional who will explain to you how and why an annuity payment will result in far less net money if and when a wealth tax and much higher income tax rate is factored in. You may also want to get some information on how inflation devalues the dollar.

        ** Some people fulfill their dreams by receiving entitlements from the Government while others wake up and work hard for it! **

          rdgrnr's avatar - walt
          Way back up in them dadgum hills, son!
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          Posted: February 15, 2014, 11:16 am - IP Logged

          I'll try to keep this simple since you're already confused.

          The lump sum is less than the annuity payments, because it doesn't include the interest earned by the annuity. A one time asset tax would be based on the entirety of the lump sum, but only the portion of the annuity that has already been received. An annual asset tax would tax the lump sum over and over, but would still only tax the portion of the annuity that had been received to date. That means that the tax would take more from the lump sum than from the annuity payments, even though the lump sum will be less than the annuity.

          I asked because you're arguing that the possibility of increased taxes, including an asset tax, are arguments in favor of the lump sum. The reality is that the possibility of an asset tax favors taking the annuity.

          I can find only one flaw in your whole theory, Jellyman -- it's stupid.

          Now grease your comb-over down good today, it's windy out there.

          You look like a total goof when it flips over the other way in the wind.

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            Posted: February 15, 2014, 11:37 am - IP Logged

            If you planned to do zero investing, even in U.S. Treasury bonds or whatnot, then the annuity makes a little more sense. For me, taking the cash is about taxes and returns. Honestly the way things are looking, the only way taxes can go is up, which means those annuity payments won't be as much as if you planned 39.6% tax as worst case scenario. Taking it now gets the tax business out of the way, and you will only have to pay taxes on gains (although there are crafty ways the rich use to reduce this). Also, investing even a portion, say 50-75% of the lump sum, at a very menial rate of return accumulates into a larger amount than the annuity in less time! This is because the annuity is restricted to compounding only 5% of the annual payment. For both cases it is important to take into account inflation. At average rate of 3% in 30 years your annuity will only be worth a little less than $88 million (using the $213M figure you provided). Taking the cash also allows you to exercise an active role in beating inflation.

            Yea, its all about CONTROL of ALL of the money.  Not hard to beat the annuity return it offers. 

            GIMMY THE CASH UPFRONT!!!

              Teddi's avatar - Lottery-008.jpg

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              Posted: February 15, 2014, 5:41 pm - IP Logged

              Confused? It seems you are the one who doesn't understand basic arithmetic. The annual interest earned on both PB and MM jackpot annuities is just a tad over 2%. Any competent investor or firm can and should easily double those returns.

              Lets say in five years our Government follows in the footsteps of socialist France and implements their 1.5% annual wealth tax along with the top tier tax rate of 75%. Without factoring any potential investment gains from the lump sum, the total net will far exceed what anyone would get from the annuity over it's 30-year payment schedule.

              In your weak attempt at legitimizing taking the annuity by only factoring in an annual wealth tax and NOT an increase in Federal tax, you don't realize that by taking the lump sum there is a good chance that the gains on investment will outweigh a 1.5% annual wealth tax or the 3.8% Obamacare tax.

              Teddi had referred in an earlier post that the lump sum would not be beneficial IF that money wasn't given a chance to grow through investments and only kept in a low interest bearing bank account (which currently returns less than 1%). That is the only scenario outside of an age issue in which the annuity would be the better choice   

              Do yourself a favor and go talk to seasoned tax professional who will explain to you how and why an annuity payment will result in far less net money if and when a wealth tax and much higher income tax rate is factored in. You may also want to get some information on how inflation devalues the dollar.

              Jill, a word of advice, don't lower yourself by responding to the inanity. Simply ignore it. Some people wallow in their wrongness and will go to the mat arguing that the sky is green. Nothing you can say will change their view and the more sense you make the more they resort to petty name calling and puerile behavior. It ain't worth it. Leave them to their belief that the sky is green because them thinking that doesn't negate the FACT that the sky is blue AND you save yourself the aggravation.

                OldSchoolPa's avatar - Lottery-057.jpg
                Gurnee, Illinois
                United States
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                February 12, 2007
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                Posted: February 15, 2014, 6:17 pm - IP Logged

                Although I would be very tempted to take the cash value, I could also consider the annuity if my accountant lays out a compelling reason to go that route. What I would have to weigh is

                1) How long will short term and long term interest rates remain pathetically low?

                2) How high will the effective tax rate go on high income earners?

                3) How long it will be before US elects president and Congress that is serious about reigning in spending?

                The reason all of that matters is when I hit the jackpot, I would not place large positions in all stock equities. The majority would be conservatively invested with an eye to dividend and interest income so as to preserve the principal. If interest rates start to tick upwards, it would be better to take cash value. If tax rates continue to rise to levels seen in France, it will be better to take cash value. If president and congress cannot get act together, it definitely will be better to take cash value since it will be easier to cut and run to another country if America suffers the entitlement meltdown seen in Greece, France and Spain.

                If another Dem wins the WH in 2016, you should definitely take the cash value.

                Get MONEY!!! Winning a JACKPOT lottery is all the HOPE and CHANGE I desire!!!  NOW give me MONEY!US Flag

                The guy who won the presidency in 2008 really won the lottery...he is now millions richer, travels in first class style, and even has a staff that would be the envy of the richest Powerball winner (she has a staff of 2). Every night he goes to sleep, he probably plays the close of Dave Chappelle's Show: I'm rich beyatch!

                  rcbbuckeye's avatar - Lottery-043.jpg
                  Texas
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                  October 23, 2007
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                  Posted: February 16, 2014, 9:22 am - IP Logged

                  Although I would be very tempted to take the cash value, I could also consider the annuity if my accountant lays out a compelling reason to go that route. What I would have to weigh is

                  1) How long will short term and long term interest rates remain pathetically low?

                  2) How high will the effective tax rate go on high income earners?

                  3) How long it will be before US elects president and Congress that is serious about reigning in spending?

                  The reason all of that matters is when I hit the jackpot, I would not place large positions in all stock equities. The majority would be conservatively invested with an eye to dividend and interest income so as to preserve the principal. If interest rates start to tick upwards, it would be better to take cash value. If tax rates continue to rise to levels seen in France, it will be better to take cash value. If president and congress cannot get act together, it definitely will be better to take cash value since it will be easier to cut and run to another country if America suffers the entitlement meltdown seen in Greece, France and Spain.

                  If another Dem wins the WH in 2016, you should definitely take the cash value.

                  Amen OldSchoolPa.

                  CAN'T WIN IF YOU'RE NOT IN

                  A DOLLAR AND A DREAM (OR $2)

                    Avatar
                    NH
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                    Posted: February 18, 2014, 5:37 pm - IP Logged

                    I play two sets of numbers on Powerball and Mega Millions. When the jackpot gets over 200 million, I play the same numbers twice. Meaning if I hit the jackpot, I have two winning tickets. I would then take half lump sum and half anniuty no matter what my financial advisors tell me to do. Which of course they would tell me to take it all in a lump sum. I know taking half of it in an annuity will leave plenty of money on the table because of interest rates where they are today. But it's all about peace of mind to me. I'd take 3 million off the lump sum for a very nice home and toys and what not and then leave the lump sum alone and live off the yearly anniuity payments. I'd be more concerned about being ripped off by the financial gurus i'd have to hire than the government. I know this isn't the smartest way to collect the jackpot. But it's almost a sure fire way to not go completely broke...

                      Win$500Quick's avatar - Lottery-050.jpg
                      Florida
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                      Posted: February 18, 2014, 7:51 pm - IP Logged

                      I play two sets of numbers on Powerball and Mega Millions. When the jackpot gets over 200 million, I play the same numbers twice. Meaning if I hit the jackpot, I have two winning tickets. I would then take half lump sum and half anniuty no matter what my financial advisors tell me to do. Which of course they would tell me to take it all in a lump sum. I know taking half of it in an annuity will leave plenty of money on the table because of interest rates where they are today. But it's all about peace of mind to me. I'd take 3 million off the lump sum for a very nice home and toys and what not and then leave the lump sum alone and live off the yearly anniuity payments. I'd be more concerned about being ripped off by the financial gurus i'd have to hire than the government. I know this isn't the smartest way to collect the jackpot. But it's almost a sure fire way to not go completely broke...

                      Not a bad idea. There was a couple on the LCML who did the same thing. The husband and wife took half annunity and half cash. Financial advisorus prey on people who are not financially savvy and win a huge windfall. No one will protect your money more than you. Take a finance course and learn to manage your own money.

                      Guess Who's Back?


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                        Posted: February 20, 2014, 11:22 am - IP Logged

                        Insane inflation, that is why.

                        Getting an annuity of $750,000 a year sounds good now, but it won't be so sweet in 25 years when an average new car costs $250,000, new homes $2,000,000, a gallon of gas $75, and a weeks worth of groceries $5,000.

                          Win$500Quick's avatar - Lottery-050.jpg
                          Florida
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                          Posted: February 24, 2014, 12:26 pm - IP Logged

                          I found this article online from 2012 and it made me rethink the annunity option:

                          If You Win The Mega Millions Jackpot, Don't Take The Annuity!

                          Yesterday, we asked readers how they'd take their lottery winnings if they won this week's Mega Millions jackpot. The choice is between a lump sum and annuity. 

                          Mega Millions describes the options: "Annuity option: Provides annual payments over a 26-year period.  For every $1,000,000 in the jackpot, you will receive approximately $385,000 per year before taxes. Cash option: A one-time, lump-sum payment that is equal to all the cash in the Mega Millions jackpot prize pool." 

                          As of press time, 88 percent of our readers would take the lump sum. But is that a smart choice? We asked Libertas Wealth Management advisor Adam Koos to give us his take, and he told us the lump sum wins by a longshot. Here's why: 

                          It's a smarter investment. This week's jackpot stands at $540 million, with the cash option being $389 million. Assuming a winner pays 35 percent of income tax, that comes to $252,850,000. Putting that into a super conservative portfolio—without touching the principal—that returns around 3 percent would generate a princely $7,585,500 in a year, says Koos. And if you leave this world too soon? No worries—your inheritors will still have the principal to play with. 

                          More control of your money. When Ohio state workers are given the choice between a reduced pension check or annuity when they retire, Koos always tells them to take the check. "You can always make up for the difference by taking the lump sum and investing," he says.  And why wait for a yearly allowance from the lottery commission—which could go out of business theoretically—to spend or donate your money? "You can't get more money if you have a cap on it," says Koos, "no matter how much you need or want to give to charity." Another note: If your spending habits suck, this won't make them better. 

                          You'll beat the IRS. Today's tax bracket for the ultra-rich is historically low—35 percent. The current jobs bill being proposed could hike that bracket to 39.6 percent. If that happens, get ready to pay more on your lottery payout each year. And the bracket could always go higher. "It's better to take the tax hit today, then invest the rest of the principal in various ways," says Koos. "Pay it up front while the taxes are low."

                          Guess Who's Back?

                            spartan1707's avatar - Lottery-050.jpg
                            Tucson
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                            Posted: February 24, 2014, 12:38 pm - IP Logged

                            Great reasontoo take the cash. Big Gov needs big taxes.

                              helpmewin's avatar - dandy
                              u$a
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                              Posted: February 24, 2014, 12:44 pm - IP Logged

                              Great reasontoo take the cash. Big Gov needs big taxes.

                              Annuity payments would make more cent$Dance

                              Let it Snow Snowman