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.

1. The Default Account

When you make more than you spend, funds automatically accumulate in your 'DEFAULT 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 Default 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 & Account Types

Change the properties of an Account by clicking on the any "Accounts, Assets & Taxes" table cell. Based on the kind of account, different options/fields may be visible/hidden:

Item Properties

Type: The account type controls certain calculation rules, as described below:

Account Options

Item Properties

Fund Starting Balance with Income / Assets: By default, an account's Starting Balance is not funded through income or assets — the starting balance is simply added-in without drawing funds from elsewhere.

Use this option to pull income / assets to fund an account's starting balance. This is useful, for example, when planning for the future purchase of a property. Unlike an Expense item, which is prorated over the course of a year, funding the starting balance applies all the funds at once, creating a more accurate estimate of your calculated balance throughout the year.

Item Properties

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.

Item Properties

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.

Item Properties

SEPP / Rule-55 Distributions: Applicable only to Retirement Accounts, this option allows you to define distributions before age 59 1/2 (based on IRS rules) that do not trigger an Early Withdrawal Penalty. Configure these distributions by defining an Age Range with 'Negative Contributions'.

Item Properties

Rollover on End Age to: Normally, an account's funds are rolled over to your default account on an account's End Age. To specify a different account to receive rollover funds, select this option. If there are no accounts listed, ensure the end age of the account is less than the Trajectory End Age, since rollovers cannot performed in the final year of your trajectory.

By default, all applicable taxes are deducted when funds are rolled over. To rollover funds tax-free (such as when rolling over from a 401k to a Traditional IRA), select the Tax-Exempt option. It is up to you to ensure the FROM and TO accounts are valid for tax-free rollovers.

(Note: Previously, funds could ONLY be rolled over to your default account — and a contribution to a retirement account had to be created 'manually'. This is no longer necessary, so if you previously created a manual rollover contribution, it can now be removed after selecting this option and choosing an account)

Item Properties

Convert to Roth: Applicable only to Traditional IRA and 401k accounts. If checked, various options are displayed to allow you to convert the account to a Roth IRA. For more information, see the section 10. Roth Conversions, below

Item Properties

Receives Unfunded Contributions: This option causes any contribution defined to be made regardless of cashflow or available funds in other accounts. The contribution is simply added to the account balance, allowing you to model in a goals-based rather than cashflow-based framework.

Item Properties

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. Start Age / End Age

Start Age

The Start Age of an account is the age/year you begin tracking those funds. The Starting Balance is added to your overall assets (note that by default, start balances are not 'funded' from cashflow, they are simply added to your trajectory). For accounts that start at the beginning of your model, the amounts are all included in the first line of the Grand Total output data table. For accounts that begin at some point AFTER the beginning of your trajectory, the starting balance appears in the "Other Contributions" column, as shown below:

Start Balances

Unlike 'age ranges' for incomes or expenses, account age ranges must be continuous without any gaps between them.

End Age

The End Age is the age an account is closed or funds 'rolled-over' to another account. 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 'Default Account' at that time. Funds always go to your default account, however you can define a 1-year age range and contribution to another account if you wish the funds to go somewhere else.

4. Contributions & Negative Contributions

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).

Do Not Inflate Contribution: 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.

Rollover Contribution: If funds being contributed to a tax-deferred retirement account are the result of a rollover from another tax-deferred account (usually a 401k or Traditional IRA) — those funds do not typically provide the tax benefit associated with contributions to such an account (i.e. tax credits for pre-tax contributions). Select this option to prevent tax credits / benefits from being applied to the contribution. This option is only visible on tax-deferred 'Retirement' type accounts.

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 "Default 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.

5. 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

6. 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.

7. 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.

8. Alerts: Notifications, and Warnings

OnTrajectory alerts you about potential problems in your plan. There are two types: Notifications and Warnings. If a warning is raised the "Alerts" button will turn dark red. Examples of Warnings include:

9. Required Minimum Distributions (RMDs)

OnTrajectory automatically distributes funds from 401k/403b/457b and Traditional IRA accounts according to IRS rules.

This feature can be disabled or the RMD Start Age changed by going to Menu / Calculation Options. The minimum start age is 70, based on published IRS tables.

If the Account Property "Inherited IRA" is checked, RMDs will begin immediately, based on published IRS tables.

10. Roth Conversions

To convert funds from a Traditional IRA or 401k/403b to a Roth IRA, check "Convert to Roth" on the Item Properties tab. You can choose either to create a new Roth IRA account or select and existing Roth IRA to receive the converted funds. Conversions begin on the "Start Age" designated. For each year funds are converted, taxes are paid and the remaining funds are transferred into the Roth IRA account you have designated.

You can "ladder" the conversion over a period of years in roughly equal portions. Alternately, you can choose to convert an amount each year based on a specific tax bracket.

Roth Conversion

When choosing Remain within Tax Bracket, the amount converted is based on the maximum amount for the particular tax-bracket selected minus income, annually-taxed gains, and RMDs (if any) for that year. The conversion continues every year until all funds are converted, although it is possible that not all funds are converted depending on other taxable income and gains in each year during the conversion.

Set the Max Amount to Convert field to limit the amount of funds converted. If left blank, OnTrajectory will attempt to convert all funds based on the properties set.

Converted funds appear in Output Data as a "Rollover Withdrawal" from the source account and a "Defined Contribution" in the target account.

11. 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.

The following topics will be covered in this Guide: