Retirement Planning

one-time payment

What is a one-time payment?

A one-time payment is usually a large payment, paid in one lump sum rather than in installments. It is also known as “bullet repayment” when processing a loan. They are sometimes associated with pension plans and other retirement vehicles, such as 401(k) accounts, in which retirees receive small up-front one-time payments instead of larger amounts paid over time. These are usually paid in the case of bonds.

key takeaways

  • A lump sum payment is an amount paid in one lump sum, not in installments.
  • A one-time payment isn’t the best option for every beneficiary; for some, it may make more sense to convert the funds into recurring payments.
  • Depending on interest rates, tax circumstances, and penalties, annuities may end up with a higher net present value (NPV) than a lump sum payment.

Learn about one-time payments

A one-time payment is also used to describe a bulk payment made for the purchase of a group of items, such as one company making a lump sum payment for another business’s inventory. Lottery winners often also have the option of making a one-time payment rather than an annual payment.

There are pros and cons to accepting a lump sum payment instead of an annuity. The right choice depends on the value of the lump sum payment versus the payment and the individual’s financial goals. Annuities provide some level of financial security, but retirees with ill health may benefit more from a lump sum payment if they don’t think they will live long enough to receive full benefits. By receiving an advance payment, you can pass the funds on to your heirs.

Also, depending on the amount, an advance payment may enable you to buy a house, yacht, or other large purchase that you would otherwise not be able to pay with an annuity. Again, you can invest the money and potentially earn a higher rate of return than the effective rate of return associated with annual payments. Or, of course, you may lose money on your initial investment.

Replacing regular annual payments with a one-time payment is not always best; if offered the option, consider taxes, investments, and net present value (NPV), which accounts for the time value of money.

lump sum payment vs annuity payment

To illustrate how lump sum and annuity payments work, let’s say you win a $10 million lottery. If you make the entire winnings as a one-time payment, the entire winnings will be subject to income tax for the year and you will be in the highest tax bracket.

However, if you choose the annuity option, the payment may come to you decades later. For example, your annuity payment might be $300,000 per year instead of $10 million in annual income. While that $300,000 is subject to income tax, it may keep you out of the highest state tax bracket. You can also avoid up to 37% of the federal income tax bracket for incomes over $523,600 in 2021 and $539,900 in 2022 or $628,300 and $647,850 for married couples filing jointly in 2021 and 2022.

Such tax issues depend on the size of the lottery win, current income tax rate, projected income tax rate, state of residence at the time of your win, which state you will live in after you win, and the return on your investment. However, if you can earn more than 3% to 4% annual returns, the one-time payment option is usually better for a 30-year annuity.

Another great benefit of taking money over time is that it gives the winner a “redo” card. By receiving a check every year, winners have a better chance of managing their money properly, even if the first year is bad.

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