When you see an advertisement for a lottery, it usually states a certain amount of prize money -- for example, $50 million. However, if you win the lottery, you will not be able to take home the entire $50 million in cash immediately. The advertised lottery value refers to the amount of money you will receive over the years if you choose to get the money as a series of payments. You may be able to choose to get the money as a lump sum payment, but you will not receive the entire advertised amount.
1. Check the advertised value of the lottery prize.
2. Contact the party that organizes the lottery to determine the cash option value as a percentage of the prize money. If you were to take the money as a series of payments, the lottery organization would invest a certain amount of money, earn interest on it and pay you both the original invested amount and the interest over time. With the cash option, you take only the amount of money the lottery organization would otherwise invest for you and forgo the interest. The cash value is usually about half of the advertised prize value. For example, it is 51 percent of the advertised value in Illinois and 56 percent of the advertised value in Georgia.
3. Multiply the advertised prize value by the cash option value percentage to get the amount of money you would get if you were to choose the cash option. For example, you would take home $25 million if your $50 million prize has a cash option value of 50 percent.
- It makes financial sense to take the cash option if you can invest the lump sum at a higher interest rate than the lottery organizer could pay you.
- Taking the cash option may reduce your tax burden because the government taxes your winnings at the highest tax bracket. If you were to take the cash and invest the money yourself, you may be able to invest it in a vehicle that is taxed at the capital gains tax rate, which is lower.
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