Fixed Annuitization Method – Definition

Cite this article as:"Fixed Annuitization Method – Definition," in The Business Professor, updated January 14, 2020, last accessed August 3, 2020, https://thebusinessprofessor.com/lesson/fixed-annuitization-method-definition/.

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Fixed Annuitization Method Definition

The Fixed Annuitization Method is one of the methods through which individuals retiring before the age of 60 (early retirees) can withdraw their retirement funds without any penalty by the IRS. This method distributes funds from an early retirees’ IRA plan prior to the stipulated retirement age by the IRS. In the fixed annuitization method, an annuitant receives periodic annuity distribution (income payments) for a specific period or for the rest of the retiree’s life.

In certain cases, some employees might need to retire before the stipulated retirement age, such employees can access their retirement funds through the provision of Rule 72t. There are three methods through which early retirees can access their retirement funds, the fixed annuitization method is one of them.

A Little More on What is the Fixed Annuitization Method

In the fixed annuitization method, once the payment amount for a retiree is decided, it remains unchanged. This payment amount is determined by dividing the account balance of the retiree by an annuity factor decided by the IRS. Aside from the fixed annuitization method,  the other two methods for making penalty-free retirement withdrawals are the required minimum distribution and the fixed amortization method.

The penalty-free retirement withdrawal methods are calculated differently and give different payment amounts. While both the fixed annuitization and fixed amortization methods are the most complex methods, the fixed annuitization method sometimes has the highest payment amount.

IRS Calculation Methods

The payment amount for the fixed amortization method is calculated by dividing the retiree’s account balance by an annuity factor which is derived from the IRS mortality tables and an interest rate that is less than 120% of the federal mid-term rate.

The IRS also stipulates the calculation methods for other penalty-free retirement withdrawal methods. For instance, the required minimum distribution method is recalculated every year, using the life expectancy, age and distribution calculation year, this method often offers the lowest payment amount.

The payment amount for the fixed amortization method is calculated by amortizing the account balance of the retiree over a specific period of years equal to the life expectancy and an interest rate not more than 120% of the federal mid-term rate.

References for “Fixed Annuitization Method”

https://www.investopedia.com/terms/f/fixed-annuitization-method.asp

https://financialducksinarow.com/141/sosepp-fixed-annuitization-method/

www.mysmp.com › Personal Finance

www.retirementdictionary.com/…/annuitizationmethodorfixedannuitizationmethod

https://www.thebalance.com › … › Retirement Decisions › Before Retirement › IRAs

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