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Typically, a structured settlement funds an annuity with pre-tax dollars. This results in a major tax benefit. The growth on the annuity accrues tax-free—similar to how most retirement plans grow tax-free. To see the tax benefit, consider the lump sum payment alternative. With a lump sum payment, the plaintiff must first pay large amounts of income tax, and then he would invest in stocks, bonds, securities, or the like, and he will then pay income taxes on his earnings.
