Is it better for a 74-year-old to take a lump sum of $5 million or to take $10,000 a week for life in the Publishers Clearing House sweepstakes?

by Thomas N. Alvaré, CPA | Sep 10, 2019

With the Publishers Clearing House sweepstakes, which is better: take a lump sum of $5 million or take $10,000 a week for life? I am 74 years old. I haven't won yet, but I was just wondering which would be better.

The decision to take prize money in a lump sum or a series of weekly, monthly, or annual payments is impacted by many factors, not the least of which is taxes. Before we get into the arithmetic behind the two options, there may be compelling personal reasons for one choice over the other. The lump-sum amount, after taxes, might be put to valuable use for family needs, an emergency, paying off debt, or to invest in something or someone that could help multiply its value or produce a significant rate of return. Those needs and opportunities are impossible to quantify, but could help make the decision. There’s also the concern about managing the funds properly when taking a lump sum. This could have many unintended consequences: lives have changed or been destroyed by sudden wealth.

For a 74-year-old like yourself, life span is another factor in the decision to take payments “for life.” For a very young person, payments for life option is likely the best way to go, barring any terminal illness or other life-limiting threat. The general life expectancy of a 74-year-old woman is about 14 more years, but we really don’t know how many more years we have. Life expectancy is an average. Health and wellness, genetics, lifestyle, marital status, and level of wealth all play meaningful roles in how long we live. Regardless of the math, the decision is clearly a personal one as much as it is financial.

A $5 million lump sum prize is federally taxable. Many states also tax winnings. When taxed as a lump sum, more of the winnings will be taxed at the highest federal tax rate than the annual payments. Annual payments enjoy the benefit of having a standard deduction ($12,000 for a single taxpayer) apply every year, whereas with the lump sum the deduction is applied only once, in the year of receiving the winnings. Also, the first layers of income are taxed at lower rates, and these will apply to the annual payments every year vs. only once to the lump sum. These differences in federal tax can really add up. The longer they continue through annual payments, the greater the tax savings.

For the lump sum, the federal tax cost for a single taxpayer using the standard deduction and assuming no other income would be $1,810,500 in the year of receiving the winnings. Adding assumed state taxes at 4%, the net after-tax winnings would be $2,977,500 (60% of the prize money). Receiving weekly payments of $10,000 or $520,000 per year would carry a tax cost of $153,000. The net after-tax winnings would be $367,000 per year (71% of the prize money). It would take 8.1 years to equal the lump-sum amount, ignoring the time value of money. That would take much less than the 14 years life expectancy to equalize the net winnings. Of course, there is value to having the lump sum in the bank, so we should factor in the time value of money into the equation. With the time value of money at 2%, it stretches the equalization point out to 8.85 years of annual payments to make annual payments the better financial choice. It may come down to how optimistic you are that you will outlive your life expectancy.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Thomas N. Alvaré, CPA, and colleagues with JFS Wealth Advisors in Doylestown, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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