How to Calculate the Value of an IRA With Increases in Monthly Withdrawals
Original post by Ryan Menezes of Demand Media
An individual retirement account (IRA) is a tax-advantaged vehicle to save for retirement. Because the money is meant for your golden years, you normally cannot withdraw from the account before retiring without facing significant tax penalties, though the Internal Revenue Service makes exceptions for home buyers, the disabled and decedents' beneficiaries. Once you start withdrawing the money in your IRA, the account's balance will drop according to geometric progression if you increase your withdrawals each month.
Add 1 to the monthly change in your IRA withdrawals. For example, if you withdraw 0.5 percent more each month, add 1 to 0.005, giving you 1.005.
Add 1 to the number of months after which you want to calculate the IRA's value. For example, if you want to find the account's value after 25 months, add 1 to 25, giving you 26.
Raise the rate from Step 1 by the number of months from Step 2. With this example, 1.005 raised to the power of 26 is 1.138.
Subtract this result from 1. 1 minus 1.138 is -0.138.
Multiply this figure by your first withdrawal amount. If you withdraw $1,000 during the first month, multiply $1,000 by -0.138, giving you -$138.
Subtract your rate from Step 1 from 1. 1 minus 1.005 is -0.005.
Divide the figure from Step 5 by the rate from Step 6. -$138 divided by -0.005 gives you $27,600. This is the amount that you will withdraw over the period.
Subtract this value from the IRA's balance. For example, if the account has a balance of $250,000, subtract $27,600 from $250,000, giving you $222,400. This is the IRA's value.
- Internal Revenue Service: Publication 590 (2010), Individual Retirement Arrangements (IRAs)
- Financial Mathematics; Budi Frensidy
About the Author
Ryan Menezes is a professional writer and blogger. He has a Bachelor of Science in journalism from Boston University and has written for the American Civil Liberties Union, the marketing firm InSegment and the project management service Assembla. He is also a member of Mensa and the American Parliamentary Debate Association.
- Jupiterimages/liquidlibrary/Getty Images