Modeling Accounts: Contributions & Withdrawals

OnTrajectory requires you to have at least one Account.

Why?

Two reasons: 1. Because you need to save money — and, 2. We need some place to put it.

The following topics will be covered in this Guide:

  1. The Deposit Account
  2. Account Properties
  3. Contributions to an Account
  4. Drawdowns (Automatic & Manual)
  5. The % Growth Field
  6. The Starting Balance Field
  7. Warnings
  8. Negative Balances
  9. Required Minimum Distributions (RMDs)
  10. Roth Conversions
  11. Viewing Data and Graphs

1. The Deposit Account

When you make more than you spend, funds automatically accumulate in your 'DEPOSIT ACCOUNT' (the one with a star next to it). This means you don't have to calculate or designate annual savings for now or in the future. We calculate the amount you retain based on income minus expenses/contributions in any given year. By default, all excess cashflow is saved, unless you designate a smaller percentage under Menu / Calculation Options, as shown below:

Savings Percent

Think of your Deposit Account as representing your 'default' investments — like a mutual fund or brokerage account where you would invest extra funds by default. Like other accounts you define (such as a 401k, IRA, Checking/Savings, etc.) contributions can be designated in the Contributions/yr field (as shown below), and those contributions will be made first before contributions to your other accounts — if there are any additional funds after your other defined contributions, they will be added as well.

Accounts

To create additional accounts, click the "Add Account" button at the bottom of the screen.

Add Account

2. Account Properties

Change the properties of an Account by clicking on the wrench icon . Based on the kind of account, different options/fields may be visible/hidden:

Item Properties

Description: Controls certain calculation rules about the account.

Prevent Automatic Drawdown: Unchecked by default, this field controls whether OnTrajectory will automatically draw funds from this account to cover Expenses/Contributions, as required. If checked, funds will NOT be available for Expenses/Contributions until the End Age of the account is reached. For more information, see 'The Contributions / Year Field' section below.

Inherited IRA: Applicable only to IRA Accounts, this field allows you to designate an IRA as 'Inherited', meaning that special RMDs for Inherited IRAs (as defined by the IRS) will be enforced based on the Start Age of the account.

Convert to Roth (on End Age): Applicable only to Traditional IRA and 401k accounts. If checked, when the account's End Age is reached, taxes will be paid on the amount converted, and it will be treated as a Roth IRA until the overall Trajectory End Age.

For more information, see the section 12. Roth Conversions.

By default, the conversion will occur in 1 year, however you can select to "ladder" the conversions for up to 10 years using the "Number of years" dropdown OR you can convertt amounts based on staying below certain ] tax brackets as selected — shown below:

The amount converted will be made in roughly equal portions each year, and it will appear as a "Rollover Withdrawal/Defined Contribution" each year it occurs.

Alternately, if tax "brackets" are used, only funds thet keep you under that bracket will be converted.

Receives Unfunded Contributions: This option is primarily applicable to modeling Home Equity, however, it is available on other types of accounts as well. If checked, Contributions defined for the account will be made without decreasing any Income or Account. The contributions will simply be added, as if out of thin air.

Owner: Allows you to set a different Owner with a different Birth Year for the account. See Adding a Spouse / Owner for more information.

3. Contributions to an Account

Contributions to an Account can be defined in several ways — based on the type of account selected:

Contributions

By $ or % — the Annual Contribution amount can be defined as either a fixed dollar amount, represented by $ or as a percentage of Income, represented by %. If a percentage is designated you must select the Income item that the percentage should be based on (for example, many folks contribute to their 401k based on a percentage of their salary).

NOTE: Since 401k contributions depend on income, you must always select an Income item when configuring contributions to it.

In addition, for 401k/403b/457b and HSA account types, you can also designate an Employer Contribution — again, either as a fixed amount ($) or as a percentage (%).

You may ask, what happens if I designate a Contribution to an account, but I don’t make/have enough to cover it? (that’s a great question, btw).

For contributions to a 401k, OnTrajectory will ensure there are sufficient funds from the designated Income source to make the contribution. For other types of contributions, they are treated the same as Expenses and are funded in the following order:

  1. From your Income for that year,
  2. From whichever Account is next based on drawdown rules (see the following section).

In addition, you may choose to prevent contributions from increasing with Inflation. By default, contributions increase along with Inflation just like Income and Expenses. If you do NOT want a particular contribution to increase with Inflation, click the Do Not Inflate checkbox.

Negative Contributions

If you wish to designate either a one-time or multi-year amount to remove from an Account, you can do so by creating a new age range and entering a negative amount for the Contribution. The amount will be removed from the account and taxes assessed accordingly. The funds will be deposited into your "Deposit Account".

This feature gives you the ability to further define your personal Drawdown Strategy. It could be either a one-time drawdown, by defining an age range with same start and end age — or it could be for a number of years.

4. Drawdowns (Automatic and Manual)

This topic is discussed more completely in the guide "Drawdown Preferences".

When funds are needed, they are automatically drawn from your various accounts in a specific order. The table below outlines the default order in which funds are drawn-down (NOTE: EWP stands for Early Withdrawal Penalty and typically applies to withdrawals from non-Roth Retirement accounts before age 60. This setting can be turn off under Menu / Calculation Options):

  1. Annually-Taxed Accounts
  2. Tax-Exempt Accounts
  3. Tax-Deferred (non-retirement) Accounts
  4. Retirement Roth Accounts without EWP
  5. Retirement Non-Roth Accounts without EWP
  6. Roth Contributions
  7. Retirement Accounts with EWP

5. The % Growth Field

% Growth represents an average rate-of-return over a given period. Obviously, this number is conjecture, but "common wisdom" suggests using about 3% for conservative investments, 5% for medium-risk, and 7% for higher-risk. OnTrajectory offers you other ways to simulate future investment growth, such as Monte Carlo and Historical Simulations. Those are discussed in the guide Monte Carlo and Historical Simulations.

Note: Enter the nominal return rate you expect on your investments. OnTrajectory automatically accounts for inflation when viewing in "Today's Dollars", which is the default view.

6. The Starting Balance Field

This amount is the balance of an account when you set-up the Item. Only the first Range of an Item can have a Starting Balance, therefore it is disabled for any subsequent Ranges of that Item.

7. Warnings

OnTrajectory warns you about potential problems in your plan. Examples of Warnings include:

8. Required Minimum Distributions (RMDs)

OnTrajectory automatically distributes funds from 401k/403b/457b and Traditional IRA accounts according to IRS rules starting at Age 70. You can disable this feature on the 'Advanced' tab located in Settings

If the Account Property "Inherited IRA" is checked, RMDs will begin immediately and not wait until age 70.

9. Roth Conversions

To convert a Traditional IRA or 401k to a Roth account, check Convert to Roth, which is listed on the Item Properties tab. This option is applicable only to Traditional IRA and 401k accounts. If checked, when the account's End Age is reached, taxes will be paid on the amount converted, and it will be treated as a Roth IRA until the overall Trajectory End Age.

By default, the conversion will occur in 1 year, however, you can select to "ladder" the conversions in equal amounts for up to 10 years. Alternately, you can choose to convert a certain amount each year based on a specific tax bracket, as shown below:

When choosing "Remain within Tax Bracket", the amount converted will be based on the maximum for a particular bracket minus income and annually-taxed gains you have for that year. The conversion will continue every year until all funds are converted.

The amount will appear in Output Data as a "Rollover Withdrawal/Defined Contribution" every year it occurs.

10. Viewing Data and Graphs

You can see the growth of your individual Accounts on a yearly basis both from a graphing and data perspective. From the Accounts & Taxes tab, press the graph-icon on the tab to get a visual representation of each accounts growth and depletion, as shown below:

Investment Tax

For Data, go to Menu / Tools & Data and click "Output Data" to see a table representations of the same information contained in the graph.