Tax Free (Until Withdrawal) Investment

How do you express/input after tax funds invested in a time locked investment which is sheltered from all taxes until it's withdrawn? I currently have it "other assets" but I fear that those funds are assumed to be subject to taxation during their tenure. There are several, each with a different date of maturity and rate of return. Perhaps they ought to be entered into 'Special Receipts' as non-taxable instead?


dan royer's picture

This sounds like an IRA if it is earning interest. You could enter it as a retirement account (IRA) which is an after-tax account that earns interest, sheltered from current taxes, and taxable upon withdraw.

You are right: the Regular assets and savings folder holds money that is subject to annual taxes on the income.

There's no simple way to adjust the rates of return on these various IRA-like investments in the retirement accounts since in regular "economics mode" you set one rate for the whole pool of money.

If you were using ESPlannerPLUS, you could use monte carlo mode and then assign different parts of the regular assets pool to different kinds of asset classes. You could do the same for different pools of money in the retirement assets. In other words, instead of having one rate of return for all regular assets or one rate of return for each of the two (husband/wife) pools of retirement assets, you could get more specific with the asset class and rate of return they are invested in. I'm not sure that would solve the problem you feel you have.

I would suggest entering after-tax funds that are sheltered from taxation until withdrawal as an IRA in your retirement account and leave them subject to the same rate of return as all of your retirement accounts set in the Assumptions area. Next, I would run multiple reports with different assumptions about that rate of return to find out how much difference a 3%, 5%, 7% assumption really makes. If may make little difference.

Thanks. Let me try out some of this. Can I enter the total of these funds in the "Supplemental Retirement Accounts" field?

dan royer's picture

Sure. The only one that really treats things differently for tax purposes is the ROTH field.

I am told there is a portion of the total money I invested with the vendor they call a 'tax cost basis' which is not subject to taxation upon withdrawal. They tell me just the interest would be subject to taxation. Does this info change anything?

dan royer's picture

For a traditional IRA, you don’t pay taxes on money in the account until you withdraw it. At that point, all of it is taxable, so there may be no cost basis at all. For Roth IRAs, cost basis isn’t used because all of the money properly withdrawn after you reach age 59 1/2 is tax-free.

It sounds like what you have is NOT an IRA but rather just regular assets (non retirement assets) that are invested in some tax free bond or something like that.

If that's the case, use the Assumptions / Taxes area and indicate the percentage of your regular assets that is in municipal bonds (or other tax free positions) and if there's a "basis" in place now, you can enter that amount as the "unrealized long-term capital gains/losses on regular financial assets" on that same screen. I'm not much of a tax accountant, but that's how I understand it.

Thank you.....So, beginner that I am, I would add this money to the amount already in my 'Regular Assets' (like where it says 'Other Assets' I would guess), add the % this amount represents relative to the 'Total' computed/appearing on the same 'window' in "Assumptions/Taxes" combined with the "tax cost basis" provided to me by the investment firm on the same 'window', run the report and 'voila'. Am I correct so far?

dan royer's picture

Yes, that's right . . .

Thank you.

On the "Annual Suggestions" page, under the "Saving" is a column of figures in parentheses. Probably the dumbest question you will have heard today, but what does that figure represent?

dan royer's picture

That's "dissaving" or withdraw from that regular assets account.

The Annual Suggestions report is one of the most important reports because it shows your discretionary spending and the saving/dissaving pattern into regular assets. This is what helps to smooth that discretionary spending. That saving is not coming out of the discretionary spending number. The discretionary spending number is what's left over after saving, taxes . . . well, after everything you see in the Total Spending report and taxes.

The parenthesis just represents a negative number, a withdrawal from your regular assets.

Thank you: anything that is 'regular assets' would go into making the numbers in parentheses. Which investment is dissaved is volitional.

Each year, as a RMD is made, is that amount supposed to be added to the 'regular assets' (assuming it's not immediately spent on some high value item)?

dan royer's picture

Yes, your regular assets might be in a checking account, a mutual fund, a CD. But you are assuming some average rate of return on the entire pool of money. Whether you spend the CD or the mutual fund is up to you. Regardless, ESPLanner continues to assume that same average rate of return.

Well, it's not an intra-year accounting system. The program assumes you spend say 80,000 in discretionary spending in 2016. That amount may come from say a combination of some dissaving of regular assets, a withdraw from husband's retirement account, a withdraw from wife's retirement account, and a pension fund that you entered of some amount per year. In practice, these withdraws may come on a monthly or even weekly or daily basis. But as far as ESPlanner is concerned, they simply are withdrawn "in 2016." So the RMD if that's what you are doing from a retirement account, is coming out a little bit every day or once a week, once a month, or all at once on January 1 for the entire year. It doesn't matter. ESPlanner is just keeping track of the year as one quantum of time.

I hope that makes sense.

Yep, thanks again.

Turning attention to the "Retirement Accounts" pages of the PDF.....since I'm doing RMDs these days, "Withdrawals" I guess are coming from my traditional IRA(s). These are not listed in parentheses. Retirement Assets Income I guess is coming from the interest earned by my IRAs, I say that with a question mark so to speak, but it seems awfully low given the total in the "Retirement Assets" column. What does "Retirement Saving" mean? Why is it in parentheses? I guess I need some clarification(s).

dan royer's picture

It's just a balance sheet representing everything you have in the Retirement accounts for that person (husband or wife if you are modeling a couple). Husband and wife each have their own sheets.

The income column is just as you describe--interest on that account.

The contributions are contributions.

Withdrawals are what you are withdrawing. The "Retirement Saving" is the net between "income" and "withdrawal." So the Retirement Saving is the difference between withdrawal and income. The last column, Retirement Assets, is the running balance.


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