Frequently, people who receive a substantial severance or pension, win a large judgment in court, or win a large casino or lottery payout are advised to take their money in the form of annual payments, rather than taking a large lump sum payment all at once. There's some sound logic behind this advice – you frequently forfeit some portion of the money when you choose a lump sum payment, and besides, the simple truth is that many people are simply not good at managing large sums of money.
That's especially true for lawsuit plaintiffs or lottery and casino winners who aren't experienced with large amounts of ready cash. But if you're good with money, or if you hire someone who can give you good financial advice, there are some distinct advantages to taking a lump sum payment. Take a look at a couple of the smart ways you can make a lump sum payment work for you.
Pay Fewer Taxes
Any time you come into a large sum of money, you're required to pay the federal government their share. That applies whether you take the lump sum or whether you choose the annual payment option. But here's the loophole – they can't tax you on money you aren't currently using. Do you already have enough cash to maintain the your desired standard of living? Do you want to pass some or all of that settlement money on to your beneficiaries, or save it for your retirement? Then the lump sum payment is your best bet.
What you have to do is accept the lump sum and roll it into an IRA (Individual Retirement Account). You won't be taxed on anything that stays in the IRA. You'll only be taxed on the money that you take out of the IRA. No withdrawals? No taxes on that money.
There is one catch. Once you reach the age of 70 and a half, you will be required by the IRS to remove a minimum amount from the IRA each year and pay taxes on that amount. However, this is still good news. The minimum required withdrawals are likely to be smaller than the amount that you'd receive from an annual payout, and therefore your tax burden will still be lower than it would have been had you chosen the annual payment option. And of course, you won't have had to pay taxes on any of the money in your IRA before the age of 70 and a half.
Make Aggressive Investments
Maybe you're not content to let your money sit in an IRA, just waiting for retirement, or for distribution after your death. Instead, perhaps you'd like to put that money to work for you, and use it to make more money. That's not a bad strategy, and taking the larger lump sum payment offers you a lot of flexibility to make the investments that will net you the largest return on your cash.
The downside to that is that making aggressive investments is an inherently risky strategy. Without a run of incredible good luck, chances are good that even if you make smart investments, or hire the best financial minds available to you to manage your money, you're going to have some losses.
The trick to making an aggressive investment strategy work for you is to make sure that you have enough liquid cash to tide you over through any years of lean returns or losses on your investments. If you've made good investments and you have cash to cover your living expenses in the meantime, your portfolio will eventually rebound from any losses. You can afford to take the long view, and let your investments sit until the return is high, then sell for a nice profit.
There's more than one way to handle a large sum of money coming your way. Opting for annual payments is a safe choice, and it's the right choice for some people. But taking a lump sum may be the right choice for you. Explore all of your options before you make a decision. To learn more, visit http://www.mylumpsum.com.Share