Lump-Sum Payment Definition

What Is a Lump-Sum payment ?

A lump-sum payment is an frequently big sum that is paid in one individual payment alternatively of broken up into installments. It is besides known as “ bullet train refund “ when dealing with a loan. They are sometimes associated with pension plans and other retirement vehicles, such as 401 ( thousand ) accounts, where retirees accept a smaller upfront lump-sum payment rather than a larger summarize paid out over clock time. These are much paid out in the event of debentures .

Key Takeaways

  • A lump-sum payment is an amount paid all at once, as opposed to an amount that is divvied up and paid in installments.
  • A lump-sum payment is not the best choice for every beneficiary; for some, it may make more sense for the funds to be annuitized as periodic payments.
  • Based on interest rates, tax situation, and penalties, an annuity may end up having a higher net present value (NPV) than the lump sum.


Lump-Sum Payment

Understanding a Lump-Sum requital

Lump-sum payments are besides used to describe a majority payment to acquire a group of items, such as a company paying one sum for the inventory of another business. Lottery winners will besides typically have the option to take a lump-sum payout versus annual payments .

There are pros and cons to accepting lump-sum payments quite than an annuity. The right choice depends on the respect of the lump kernel versus the payments and one ’ s fiscal goals. Annuities provide a degree of fiscal security, but a retiree in poor health might derive greater benefit from a collocate sum payment if they think they will not live long enough to receive the stallion benefit. And by receiving an upfront requital, you can pass on the funds to your heirs .

besides, depending on the sum, an upfront payment might enable you to buy a house, a yacht, or another large purchase that you would otherwise not be able to afford with annuities. similarly, you can invest the money and potentially earn a higher rate of render than the effective rate of return associated with the annual payments. Or, of course, you could lose money on your initial investment.

It is not always best to take the lump-sum requital in stead of periodic annual payments ; if offered the choice, consider taxes, investments, and the net present rate ( NPV ), which accounts for the time prize of money.

Lump Sums vs. Annuity Payments

To illustrate how lump-sum and annuity payments work, imagine you won $ 10 million in the lottery. If you took the entire winnings as a lump-sum payment, the integral winnings would be submit to income tax in that class, and you would be in the highest tax bracket .

however, if you choose the annuity choice, the payments could come to you over respective decades. For case, rather of $ 10 million of income in one year, your annuity payment might be $ 300,000 a year. Although the $ 300,000 would be discipline to income tax, it would likely keep you out of the highest state tax brackets. You would besides avoid the highest union income tax bracket of 37 % for single people with incomes greater than $ 523,600 in 2021 and $ 539,900 in 2022 or $ 628,300 for married couples filing jointly in 2021 and $ 647,850 in 2022 .

such tax questions depend on the size of the lottery win, stream income tax rates, projected income tax rates, state of matter of residency when you win, in which state you will live after the gain, and investment returns. But if you can earn an annual return of more than 3 % to 4 %, the collocate sum option normally makes more sense with a 30-year annuity .

Another bad advantage of taking the money over time is that it provides winners with a “ do-over ” batting order. By receiving a check every year, winners have a better probability of managing their money by rights, even if things go ill the beginning year .

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Category : Finance

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