How Does the Mega Millions Annuity Work?

by Tom Gresham, Demand Media
    A Mega Millions annuity brings a yearly payday worth celebrating

    A Mega Millions annuity brings a yearly payday worth celebrating

    The odds are against you, but Mega Millions, a huge jackpot lottery in the United States, is a dream come true for its lucky winners. The game is played in more than 40 states with a jackpot that starts at $12 million. If you're fortunate enough to win, you'll be faced with a pleasant decision: whether to take the money all at once or in an annuity, which is a series of smaller annual payments.

    Annuity Payout

    The Mega Millions annuity option means you'll get an annual payment for the next 26 years. Your check will come to $38,500 per year before taxes for every $1 million in your jackpot. A minimum jackpot gives you an annuity of $462,000 before taxes. The lottery administrators withhold 25 percent for federal income taxes, though you'll owe more since you'll be in the highest tax bracket. If you live in a state with an income tax, look for an additional 6 to 9 percent to get withheld.

    Lump Sum

    You can always take the money in a lump sum and forget about the annuity. While the annuity option is calculated based on the declared lottery winnings total, with a lump sum you get everything in the jackpot prize pool. For instance, when Mega Millions hit a $500 million jackpot in 2012, the lump sum option minus taxes was $359.4 million.

    Annuity Advantages

    A central advantage to the annuity is you get the entire listed jackpot total instead of the smaller lump sum total. It also gives you a steady stream of robust income. Spreading the payments is also a way some winners force themselves to practice self-discipline. While it sounds hard to blow millions in a short time, it has been done time and time again.

    Annuity Disadvantages

    Most jackpot winners choose the lump sump option according to a 2012 ABC News report. A lump sum means you control the money immediately. You can choose your own investment plans for the windfall and tailor them to your preferences. None of that's possible with the annuity. On top of that, annuity payments usually can't be changed. If you have an urgent need for money, you won't be able to get to that money until your next annual payment.

    About the Author

    Tom Gresham is a freelance writer and public relations specialist who has been writing professionally since 1999. His articles have appeared in "The Washington Post," "Virginia Magazine," "Vermont Magazine," "Adirondack Life" and the "Southern Arts Journal," among other publications. He graduated from the University of Virginia.

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