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Annuity Factor Method Explained

Brian Carrozzi November 18, 2013

The “Annuity Factor Method” is a method to calculate the dollar amount of all eligible withdrawals that an annuity investor can make from their IRA without receiving IRS tax penalties. Life expectancy data is fundamental in calculations using the annuity factor method.

An Easy Formula

Let’s take a quick look at the formula for the annuity factor. If P = payout amount PV = present value amount and i = interest accumulated during one time period, the annuity factor formula is [1 – 1/(1+i)^n] / i, because by definition, the annuity factor is what is multiplied by P to get PV (Present Value)

Using the annuity factor method, a retirement account owner would divide the current IRA account balance by an “annuity factor.” The annuity factor is calculated based on the mortality rate table (Appendix B of IRS Revenue Ruling 2002-62) and “reasonable” interest rates – up to 120% of the Mid-Term Applicable Federal Rate.

Maintaining and Tracking Value

By using the annuity factor method, an annuity investor can ensure that he/she does not lose the principal account value to costly IRS penalties. The annuity factor method can also help account holders by showing them how much money they may need to borrow through other means (i.e. loan) in addition to taking out money from their retirement account in order to meet their current financial needs.

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