Modeling Accounts & Taxes

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. Taxes on Accounts & Income
  6. Tax Types
  7. The % Growth Field
  8. The Starting Balance Field
  9. Warnings
  10. Negative Balances
  11. Required Minimum Distributions (RMDs)
  12. Roth Conversions
  13. 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 calculate or designate annual savings. We calculate it for you.

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 other accounts, click the "Add Account" button.

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 has the lowest End Age. In the case of a 'tie', the account with the higher balance is used — Taxable Accounts before Tax-Deferred Accounts.

This technique allows you a high-degree of control in determining the source and order of funds used.

Lastly, 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.

4. Drawdowns (Automatic and Manual)

The End Age of an Account controls two different aspects, the Drawdown Order of funds and when/if an Account 'rolls-over'.

As discussed in the section on Contributions — when funds are needed, they are automatically drawn first from your "Deposit Account" (the top account in the account list, which cannot be deleted) and then from your various accounts in a specific order. The table below outlines the order in which funds are drawn-down. (NOTE: Retirement Accounts are accounts with a Description of "401k/403b/457b", "IRA-Roth", and "IRA-Traditional". Tax-Deferred are accounts with a Tax Type other than "Tax-Annual").

1. Account with lowest "End Age"
If multiple accounts... 2. Non-Retirement / Non-Tax-Deferred
If multiple accounts... 3. Non-Retirement / Tax-Deferred
If multiple accounts... 4. Retirement / Non-Tax-Deferred
If multiple accounts... 5. Retirement / Tax-Deferred (accounts without EWPs used first)
If multiple accounts... 6. Account with the highest balance

So for example, during your retirement years when expenses typically outpace income, to use funds from a Roth IRA before funds from your 401k, set the End Age lower in the Roth.

The second aspect determined by the End Age is when/if an Account 'rolls-over'. For example, if you have funds in a vacation account and want to use them in a particular year, set the End Age to that year and they will be moved into your 'Deposit Account' at that time.

5. Taxes on Accounts & Income

Investment Tax

Your 'Deposit Account' contains a % Tax field, which represents roughly your Effective Tax Rate and is used to tax both income and gains. By default, OnTrajectory creates two year-ranges for your taxes since in retirement taxes are generally lower. Under current tax law, FICA taxes are not incurred in pensions, Social Security, and IRA withdrawals — hence all other things being the same, this amount would be about 7% less than the pre-retirement tax rate.

Your Effective Tax Rate is the actual amount you pay in taxes for a given year and is not truly known until you have calculated taxes/refunds for that year, although you can get a good idea of your typical Effective Tax Rate by looking at past returns.

For example, if you make $40,000 per year, and your employer withholds 25% — but you subsequently receive a $2,000 refund, here is your Effective Rate: 10,000 (withholding) minus 2,000 (refund) equals 8,000
Divide that by 40,000 (salary) and your rate equals 20%

In addition, when you designate contributions that typically occur "pre-tax" (such as those to a 401K or Traditional IRA), OnTrajectory automatically excludes those contributions from taxable Income — meaning you needn't adjust your tax-rate to account for those contributions.

Cost Basis — In some situations, you may want to set the "cost basis" for the Starting Balance of an account. This is the amount of untaxed contributions in an account when it's first defined in OnTrajectory. Typically, this is only significant if you have a large account with sizable prior growth, such as a mutual fund account that's been growing for some time, and for which you have not paid taxes on the growth. This option is only available for accounts that have a Tax Type of "Tax-Deferred (gains only)". For more information on Tax Types, see the section below.

6. Tax Types

The tax Type dropdown contains the following options:

NOTE: Early withdrawals to Roth IRAs are taxed on 'gains-only' since contributions are made post-tax.

Again, the % Tax field on your 'Deposit Account' is used for both gains-tax and income-tax, making it easy to define Effective Tax Rates universally for any given year, as shown below:

Central Tax Rates

If you prefer to define Tax Rates for individual items Income and Account Items, click the Main Menu in the top right corner and choose Settings. On the 'Advanced' tab, deselect the option 'Use Centralized Tax Rates,' as shown below:

Advanced Settings

7. 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.

8. 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.

9. Warnings

Warnings

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

10. Negative Balances

OnTrajectory continually keeps track when expenses exceed income/savings and displays the end result on the Summary & Warnings tab, as shown below:

Summary

Notice that based on this individual's Trajectory, at Age 90 they will be 'in-the-hole' almost a 100K. That may be scary, but it's also good to know.

11. 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.

12. 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.

13. 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 "Show Account Graph" button to get a visual representation of each accounts growth and depletion, as shown below:

Investment Tax

Press the "Show Account Data" button to see a table representation of the same information contained in the graph.