The annuity factor method is one of several ways by which an investor can calculate the amount they can withdraw from their IRA before they incur penalties. These methods are also known as 72(t) payment plans. Such calculations all make some use of data compiled regarding life expectancy. Using this method the investor can protect herself against losing account value to potential penalties.
The way this method is applied means that the account holder would divide their current balance by a specified “annuity factor.” This factor is determined by average mortality rates found in the IRS Revenue Ruling 2002-62, Appendix B, as well as “reasonable” interest rates. The factor can be no more than 120% of the mid-term applicable Federal rate.
Using this method allows an investor to figure out just how much money they may need to raise on top of withdrawing money from their retirement accounts to fulfill financial obligations. A loan or sale of other assets may be in order. Taking any money from retirement accounts involves both immediate and future consequences, unless the amount is properly calculated. In an emergency, however, making use of the annuity factor method will keep you from incurring additional penalties.
As long as you remain below the figure determined by the annuity factor method you may withdraw it once per calendar year, without paying that 10% penalty. Even so, regularly withdrawing money from your retirement accounts is a bad practice. Such withdrawals obviate the point behind compounding interest and what it can do but may be necessary in light of the current financial downturn.