Investment Accounts

The Accounts panel is used to capture assets across various tax-type accounts. Three tax-type accounts are supported: Non-qualified (Taxable), Qualified (Tax-Deferred) and Roth (Tax-Free). Each one of them is described in detail below.

Types of Accounts

Non-Qualified (Taxable)

Refers to accounts in which capital gains and income distributions are taxed when received. The assets held in a taxable account are often labeled “after-tax money,” a reference to the fact that the account was funded with money on which labor income taxes have been paid.

Part of the capital gain is assumed to be distributed every year (as defined in capital market assumptions) and is thus added to the taxable income in addition to the income return. Remaining capital gain is part of the asset holding as unrealized capital gain until a sale is made from that asset.

Cost Basis

Assets held in taxable accounts have a cost basis, the amount of original investment in purchase of those assets. Cost basis is tracked at each asset class level, but for simpler user interaction, the user inputs a percentage of the total account value which represents the average cost basis across all the asset classes in each account. Cost basis is used to determine capital gain or loss when the assets are sold. Withdrawals are first made from income return and distributed capital gains and if they collectively are short in meeting the withdrawal, then sale of holdings are made to generate the remaining withdrawal.

A simple cost basis example is a person purchasing 100 shares of a mutual fund at $99 per share for a total of $9,900. If the commissions charged are $100, then the total cost basis is $10,000 at time of purchase. If the 100 shares of the mutual fund increased in value to $150 per share then the profit would be reported as $5,000 ($15,000 less $10,000). The cost basis percentage that should be entered into the tool is 66.67% ($10,000 divided by $15,000).

Roth (Tax Free)

These accounts are funded with money on which labor income tax has been paid. The assets grow tax free and are withdrawn without any tax implications after the investor reaches a specific age and conditions associated with minimum investment period. Roth IRA and Roth 401K are examples of tax free accounts.

Qualified (Tax Deferred)

These accounts hold assets that were contributed using money on which labor income taxes have not been paid. Capital gain and income return on the assets in these accounts are not taxed when realized. Taxes are due when a withdrawal is made from the account. The withdrawal from the account is fully taxable except for the return of post-tax basis. Post-tax basis is the percentage of the account’s assets which are nondeductible contributions. Purchase of an annuity from a tax deferred account (TDA) doesn't incur taxes. Withdrawals from the TDA reduce the post-tax basis proportionally however purchases of annuities in the TDA do not transfer post-tax basis to the product purchased.

Required minimum distribution (RMD)

RMDs are determined using the Uniform Lifetime Table and pre-withdrawal value of the account. Examples of Tax Deferred Accounts are: IRA, 401K, 403B. The software supports two forms of RMD withdrawal: cumulative sequential and pro-rata.

In cumulative sequential, the total RMD for one household member, from multiple TDAs belonging to that member, is taken from one TDA at a time based on the user specified withdrawal order (in the Investment Strategies tab). Although current laws allow such type of cumulative RMD withdrawals from a subset of account for balances in IRA accounts, for some other types of TDAs, like 401K, proportional withdrawal must be made from each account. Those types of accounts can be set up as pro-rata RMD, which implies that RMD from that account is not added to the cumulative RMD and it is taken from the account on which it was determined.

Additional information about tax-type accounts and RMDs can be found in the Methodology document which is available in the Help tab.

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