Mega Millions, Powerball, Florida Lotto winnings: Lump sum or annual payments? What to know

Lotteries in the high hundreds of millions are starting to seem commonplace. In August a Florida ticket was the sole winner for the largest Mega Millions jackpot in the history of the game so far, $1.58 billion, and in July, the Powerball just rolled over to $1 billion again, for the third time in the game's history.

And one question everyone struggles with, as they wait for the numbers to be drawn and they argue with friends and family over yachts vs. superyachts, investment strategies and what to wear for their first night of partying with A-listers in Ibiza, is this:

Should you take Mega Millions, Powerball lottery winnings in a lump sum or in annual payments?

The lump sum seems obvious to many people. You get more money, right now, right? Who wants to win big and then get little checks every year?

But then, you don't get as much. For a $1 billion lottery jackpot, the cash payout is $516.8 million. After taxes that's $392.8 million, which doesn't sound nearly as exciting. Maybe you should hold out for the whole thing?

There are several things to consider to decide which payout is right for you. If you win big, talk to a financial advisor before you make this decision. It will be different for everyone. But here are some things to think about while you're trying to decide what to name your superyacht.

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How much is the Mega Millions or Powerball lottery jackpot?

Before you decide whether to go for the truckload of cash dumped in your driveway or regular payments over time, we need to know how big that truck is. Couple of million? Even tens of millions?

After taxes, you may not be getting that much in a lump sum payment, comparatively speaking, and you might as well go for it. Depending on how you answer the rest of these questions, you might not want to consider anything besides a lump sum payment until the jackpot starts approaching triple digits in the millions.

What's your current financial situation?

Do you need a lot of cash, right now? You might have crippling student debt, mounds of hospital bills or expensive house repairs that need addressing, immediately. If you need a large cash flow that requires more than what the annual payments would provide, a lump sum is your best bet.

If you don't, keep reading.

Do you just want more money right now?

You might not need it, but you want it. Huge payoffs are the big draw of lotteries and the lump sum option gets you more money right away. That means immediate financial security, big numbers in your bank account, big splashy purchases, more money to pay off existing debts or to sock away for emergencies, and a dramatically different lifestyle. When you go mansion-shopping in Miami, you don't want to settle for a little one.

Keep in mind that when you take lump sum payments you may get hundreds of millions less for big jackpots than you would with the annual payment (annuity) option. That can work in your favor to make more money faster, as you have more to invest right away.

If you take the annuity option, which is 30 annual payments over 29 years, you get more of the value of the jackpot. The total payout over 30 years for a $1 billion jackpot (assuming tax rates stay the same) would be about $630 million, over half again what you'd get from the lump sum payment.

If you die before you get all the annuities, the rest is paid to your estate so you and your family will still get the full value of the jackpot.

How well do you handle money? Like, a lot of money?

Drastic changes in lifestyles aren't good for some people. It's easy to go wild and buy everything you've ever wanted, take your family, friends and total strangers on lavish vacations, hit Vegas, or invest in your brother-in-law's sure-fire startup. There are more than a few celebrities and professional athletes who have seen all their millions fade away.

According to the Certified Financial Planner Board of Standards, nearly one-third of lottery winners eventually go bankrupt, a higher percentage than for average Americans, and it's worse for people who had low incomes before the numbers were drawn. If you have low impulse control or poor financial planning skills, a big chunk of cash may not be the right option for you.

It might not even be a failing. You could just be too kind-hearted. Some lottery winners have gone broke paying off friends' and family's mortgages and medical bills or giving everything to worthy (or unscrupulous) charities.

With annual payments, you have a guaranteed income for the next three decades. That's a load off anyone's mind. If you're likely to go on the kind of extravagant spending sprees that end up on TMZ, you might want this kind of enforced budget. It also protects against losing all your cash in bad or unlucky investments.

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What do you know about taxes on lottery winnings?

There are a couple of things to consider here.

With a lump sum payment, you may pass less in taxes overall on your winnings because you'll get taxed on all of it right now and tax rates are fairly low at the moment. If you choose annual payments and taxes go up in the future, you may end up giving more of your winnings to Uncle Sam. Who knows what tax rates might be like in 15, 20, 25 years?

However, with smaller annual payments you may keep your annual income taxes at a more reasonable level, while the lump sum payment will definitely push you up into the top tax bracket. A big Powerball payday could make your annual federal tax rate triple or more.

Talk to a tax planner or tax accountant.

How old are you?

If you're middle-aged or older, you may not be confident that you'll live to see 30 years' worth of payments. Might as well get it all now in the lump sum payout and avoid estate taxes eating up more of your new wealth.

If you pass away before all the annual installments are paid, your estate with undistributed installments would be taxed at 40% of anything above $11.58 million if you're single, or $23.16 million if you're married. “The estate would have to pay the estate taxes, even though the installments haven't arrived,” said Leon LaBrecque, chief growth officer of Sequoia Financial Group.

But if you're younger, three decades of guaranteed income gives you an incredible economic cushion and financial freedom.

How safe are you?

The more money you have, the bigger a target you are. Your newfound wealth will pull in scammers, greedy friends and family, and even violent attacks. You can't win anonymously in Florida (although you can delay disclosure of your name for 90 days). And quite a few Florida lottery winners have lost all their cash, and sometimes their lives.

How confident are you in the future?

Not everyone is confident enough that the lottery companies will still be in place in 30 years to take a chance on annual payments. There are mechanisms in place to make sure that annuity payments are made, though.

How long do I have to decide if I want the lump sum or annual payments after I win the lottery?

In Florida, you have 180 days from the draw date for Florida Lotto, Powerball or Mega Millions to claim your prize but if you want the lump sum option, you have to claim it within 60 days or it will default to the annual payments.

What is the difference in annual payments between the Florida Lotto, Powerball and Mega Millions?

The 30 payments in Florida Lotto are consistent. The Lottery purchases U.S. Treasury strips to guarantee the winner equal payments for 30 years.

For Powerball and Mega Millions, the annuities are paid in installments of gradually increasing amounts.