How Does the Mega Millions Annuity Work?

Mega Millions brags that it is the biggest among America's jackpot games, with payouts reaching as high as $656 million. For a ticket that costs a dollar, that is a sizable return on investment. Winners of this lottery have the enviable task of deciding how they will receive their monies: they have a 60-day window upon winning to decide whether to take the money and run, or go the way of the annuity. The annuity option may seem like a slow way of cashing in, but with it, you get a predefined amount every year for over a quarter of a century, come rain or shine.

You have two payout options with Mega Millions: either a one-time lump sum, or a series of annual payments called an annuity. The general idea is that if you choose the first option, you get your money upfront, however the total amount will be significantly less than the advertised jackpot. With the annuity, you will get the full amount of the jackpot at the end of it all, less taxes, but it will be spread out over 26 years.

If you choose the annuity option, you will receive yearly installments of your winnings over the course of 26 years. For a jackpot of $25 million, that would mean that your annual payment will be $961,538 per year; for an advertised prize of $270 million, you will receive approximately $10.4 million annually. If patience is not your virtue, or you foresee needing the bulk of your winnings to handle your affairs, the annuity may not be your choice.

The state tax portion of your Mega Millions annuity payment can vary considerably, with some states levying no state tax on winnings, while others charge a certain percentage. Multi-state lottery resource USA Mega shows how a $69 million jackpot would be divvied, depending on the state in which you live. An annuity payment would work out to about $2.65 million per year. From this amount, 25 percent, or about $663,000, would be taken out for federal taxes; Arkansas residents would have to pay an additional 7 percent in state tax, while a Colorado resident would pay 4 percent. California residents would pay no state tax.

While some people may avoid the annuity because they would rather get their money all at once, annuities can be a good choice for people who have difficulty managing their money. On the down side, inflation can eat away at the buying power of your prize. Some people mistakenly believe that the annuity is not a good option because they will not be able to transfer the winnings after the winner dies. An Indiana lottery representative quoted in 2012 by radio station WIBC says this is not so: Mega Millions will transfer your winnings to a designated beneficiary or your estate.