Calculate the three methods of distribution approved by the IRS under Section 72(t) to withdraw funds from an IRA account before age 59 1/2 without the 10% penalty. The financial professional should make it clear that they are not offering tax advice. They should also make it clear that they are not offering tax advice from a financial agency such as an insurance company. INVESTMENTS: You must be registered with a broker/dealer to discuss investment concepts with a consumer. TAXES: This information is a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances. LIFE INSURANCE: Please remember the primary reason to purchase a life insurance policy is to protect one's beneficiaries through the death benefit. However, permanent life insurance can also serve as an accumulation tool that has some very unique benefits. To qualify for life insurance, one must take a health examination to determine insurability. Not everyone is insurable. Life insurance products contain fees, such as distribution fees and mortality and expense charges. The main way that a permanent life insurance policy is positioned to be tax advantaged is though policy loans. Policy loans may reduce the cash value and death benefit of a policy, and if they are not repaid, a loan could cause a policy to lapse. If a policy is over funded and becomes a MEC contract, the contract's earnings will be taxed as ordinary income at withdrawal, and may be subject to a 10% penalty if withdrawn before age 59 1/2. All hypothetical presentations must be based off of policy illustrations, and the illustration must be presented to the client. |
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Calculating Life Expectancy The life expectancy is determined (looked up) from IRS tables. The program includes tables for both single life expectancy and joint life expectancy. The life expectancy tables used in this program are from IRS Publication 590. Calculating the Lump Sum Required Method 1: The Annual Withdrawal is simply the balance of the account divided by the applicable life expectancy. For example, if a 56-year old person has a balance of $400,000 and specifies single life expectancy, the program would look up his life expectancy and find it to be 28.7 years. Next, the program would divide the balance of $400,000 by 28.7; this would give an annual withdrawal of $13,937.28. Method 2: Amortization Method The amortization method uses the same IRS provided life expectancy as above. Using this, the annual withdrawal can be calculated using a financial calculator. For example: Life expectancy (number of periods or years) = 28.6 Interest or earnings per year = 8% (also, set compounding to once per year) Balance of account = -$400,000 (notice the minus sign) Future Value or FV = $0 (we will reduce the account to 0) Beginning or End of year/period = End Calculate the payment (PMT) to find $35,982.66. Method 3: Annuity Method The solution for the annuity method is complex and requires a spreadsheet. The spreadsheet computes an annuity factor. The account balance is then divided by the annuity factor to determine the equal substantial payment each year. |