Annuity Factor Method
What Is the Annuity Factor Method?
The annuity factor method is a method for determining how much money can be removed right on time from retirement accounts before causing punishments. The calculation principally utilizes life-expectancy data and is applied to annuities and individual retirement accounts (IRAs). It is like the fixed amortization method, however it uses fairly various data.
How the Annuity Factor Method Works
Utilizing the annuity factor method, a retirement-account holder would partition the current IRA or annuity account balance by an "annuity factor." The annuity factor is calculated in view of average mortality rates (utilizing the Internal Revenue Service (IRS) mortality table in Appendix B of IRS Revenue Ruling 2002-62) and "sensible" interest rates — up to 120% of the mid-term Applicable Federal Rate for the period of the valuation.
Utilizing the annuity factor method, an investor can guarantee that they don't lose account value to possibly exorbitant punishments from an early withdrawal. It can likewise assist an account holder with determining how much money they might have to raise through different means, (for example, by getting a loan) as well as pulling out money from their retirement savings account to meet their current financial necessities.
Annuity Factor Method Resources
Pulling out money from a retirement savings plan ought to be a cautious decision as it gives the account holder less opportunity to recover value and earn interest on plan assets.
Several IRS publications and actuarial tables might be useful in applying the annuity factor method and retirement account withdrawals, for example, Publication 1457, which gives guides to esteeming annuities, life domains, and remainders generally. Publication 1457 incorporates the accompanying segments:
- Single Life Factors: Table S
- Last-to-Die Remainder Factors: Table R(2) 0.2%-4%; 4.2%-8%; 8.2%-12%; 12.2%-16%; 16.2%-20%
- Term Certain Factors: Table B
- Commutation Factors: Table H
- Annuity Adjustment Factors: Table K
- Mortality Table: Table 2000CM
Annuity Factor Method versus Different Methods
The fixed amortization method amortizes a retired person's account balance over their excess life expectancy (in light of IRS tables) at an interest rate not surpassing 120% of the federal mid-term rate.
The fixed annuitization method partitions the retired person's account balance by an annuity factor to determine an annual payment sum.
The annuity factor depends on IRS mortality tables and the interest rate won't surpass 120% of the federal mid-term rate. When the payment amount is determined, it can't be changed. The [required least distribution method](/required distribution) separates the retirement account balance on Dec. 31 of the prior year by the retired person's leftover life expectancy (in light of IRS tables). Thusly, an increase in the retired person's account balance will mean bigger distributions and a decline will lead to more modest distributions.
Features
- The annuity factor method is like the fixed amortization method.
- Utilize the annuity factor method to determine how much cash can be taken out ahead of schedule from your retirement accounts without suffering consequences.
- The calculation is typically applied to annuities and individual retirement accounts (IRA) since it fundamentally utilizes life-expectancy data.
- The IRS gives publications and actuary tables to assist you with applying the annuity factor method. These apparatuses can be found on the IRS website.
