Ohio woman won $40K/year for 25 years — but took a lump sum of just $366,625 after taxes. Smart move or costly mistake?

But for one Ohio woman, the question was quite literal, and it wasn’t just regarding how she’d spend it, but how she would like her payout.

Kimberlin Sawyer, of Huber Heights, Ohio, recently won a $1 million prize on a scratch-off ticket from the Ohio Lottery.

Winners have a choice about how they want to receive that prize: It can be divided into payouts of $40,000 a year for 25 years or they can opt for a lump-sum payment, which comes to about $500,000. Both amounts are before taxes.

So what’s the right move when faced with such a choice? A smaller annuity payment every year, or cashing out with a lump sum that’s half the prize money?

For lottery winners, the right answer isn’t always simple.

A hefty tax bill

Sawyer and her husband, Brian, opted to take the lump-sum payment of about $500,000. This means a big tax bill right away. The IRS taxes lottery winnings as income, and lottery agencies will deduct mandatory withholding taxes of 24% on winnings over $5,000.

Plus, if you live in a state that taxes lottery winnings, those taxes will be deducted as well — in Ohio, the state takes another 4%. Sawyer’s payout on the lump sum after both federal and state taxes was $366,625, per the press release from the Ohio Lottery.

So was this a bad idea? Whether to take a lump sum or annuity is a subject of debate when it comes to the lottery. Billionaire Mark Cuban once advised winners: “Don’t take the lump sum. You don’t want to blow it all in one spot.”

But other experts say that if you’re in the very rare situation of winning a jackpot, choosing between taking a lump-sum payout or an annuity depends on your personal situation.

Consider your situation

Lottery winners should consider their tax situation, their ability to manage money, their life stage and personal financial goals when deciding between a big payout now or an annuity.

Being aware of how lottery winnings will impact your taxes is one major concern.

While the lump-sum payout means taking a huge tax hit up front, the annuity spreads taxes out over the life of the payments, which will provide the full amount of the prize money over time.

With a lump sum, you are paying today’s tax rates; with an annuity, you don’t know whether the tax rates you’ll pay in the future will go up or down. That additional yearly income could also push you into a different tax bracket, depending on your situation.

“Deciding what method to take your winnings is not as simple as running a calculation of the present value of the future annuity payments and comparing that to the lump sum,” Dan Moskowitz, president of New Jersey-based Chatham Wealth Management, told AARP.