The first and foremost decision you will make is how to accept potential annualized payments or organized defrayals since two potential methods exist. First, you have the lump sum payment which gives you all of your monetary gains at the same time, minus Uncle Sam’s share. This is not only the most dangerous method to accept your annualized payments, it is the least lucrative of the two…at least, on the surface.
Many people vie for this option to simply pay the Federal and State tax once and for all since its earned income. But, is this option good or bad? Depends on how you think of it and what plans you make with the money. Many people actually seek financial management advice before moving forward.
Losing 25% to Federal tax and another 3-10% on state taxes may seem like a rip-off, yet it really isn’t IF you are smart with what you do with the yearly disbursements you have left. Let’s look at some pros and cons in taking lump sum payments.
Pros Of Lump Sums
- Pay income taxes once
- Have all of your annualized payments up front
- You’ll have all your money while alive
Cons Of Lump Sums
- Potentially lose more money
- Higher risk of singular incident loss
- More friends come out of the woodwork and beg you for mercy (and a cut)
Now we get to the annualized option, good for the younger generation of structured winner and could potentially come with bigger breaks. For those simply looking to stretch their annual paychecks over time and keep their current jobs, it would definitely behoove you to accept this option. Not only will this allow you to keep your annualized payments slightly more incognito, you actually lose a lot less over time.
Pros Of Annualized Payments
- Potentially larger tax breaks
- Easier way to hide annualized payments from suspicious people and keep yourself protected
- Guaranteed yearly paycheck for 26 years in a row (or more, depending on state)
Cons of Annualized Payments
- Yearly paperwork can get annoying
- Do not get all monies at once
- Lose larger investment opportunities
Overall, the way you take your structured annualized payments depends solely on your character and what you wish to achieve financially. If you are unsure what to do, perhaps first consult financial management professionals, relatives or an accountant to discuss your options and life goals you intend to accomplish.
Investing Lump Sum Into CD
Sure, you not will take a huge hit when receiving your structured annualized payments upfront yet there are even more benefits that you stand to gain if investing your lump sum annualized payments into a CD. Let’s just use $1,000,000 as an example of what you’d gain per CD purchased at the Discover Bank current rate of 3.5% on 10 year certificate of deposits.
Many people choose this path because they get a guaranteed income for as long as they remain vested into this certificate. Over time, you could actually regain what you paid out in taxes for the initial lump sum payment which is why you should entertain this option seriously. Regardless of what path is taken, never make unskilled decisions without consulting the financial management firms around your area.