Different types of payouts are taxed differently. Annuity payments are taxed as normal income—annuity payments are the most expensive payout option. A lump-sum payout is normally taxed as ordinary income; however, the payout is taxed as if you had received the money over a ten-year span, which reduces taxes slightly. You are still liable for all taxes on a lump-sum payout immediately. One advantage of a lump-sum payout is that it can be rolled over into an IRA if you want to avoid immediate taxes and continue tax-deferred growth. You can then pull the money out of the IRA as needed and pay taxes on these withdrawals. It is important that you understand the tax implications of whatever payout choice you make.