Timelineapp Announces New US Tax Feature

We’re excited to launch Timelineapp’s new US tax feature.

It’s unique in the way it incorporates taxes across a range of investment and retirement accounts, by modelling Traditional IRAs, 401(K)s, Social Security, Roth IRAs, Defined Benefit (DB) pensions and annuities.

This new feature means taxes are calculated automatically using US Federal income tax brackets. Before this, Financial Planners and Registered Investment Advisors (RIAs) had to enter the information manually for each investment account.

Users can now select the required income option as either gross or net.

Select net income, and Timeline calculates the total gross income amount a client can withdraw to sustain the required net income figure.

Select gross income, and the software uses the relevant tax brackets to calculate the income tax - and it works out the net income. Awesome!

Some specifics

We’ve modelled 85% of Social Security benefits as being taxed at the relevant tax band and 15% as being tax-free.

For 401(K) and Traditional IRAs, income withdrawals before the age of 59 incur an additional tax charge. Roth IRAs and Roth 401(K)s are considered tax-free, while DB pensions and annuities are taxed at the relevant Federal tax bands.

Within Brokerage accounts, income is taxed based on either:

• an increase in the account value, or

• as a result of interest and/or dividend payments

Timeline uses Total Return Indices for asset classes. It has estimated the average dividend and interest as a percentage of the total returns over an 80-year period. It considers years that have positive portfolio returns, so the total return is made up of:

• capital gains

• dividend and interest

All three elements are appropriately taxed within the Brokerage account.

Capital gains are taxed based on the CGT rates, depending on the individual’s total taxable income.

Dividends are considered ‘qualified dividends’ as set out by the Internal Revenue Service (IRS) tax code and they meet specific criteria for taxation. For example, dividends being taxed at lower longer-term capital gains rates rather than at higher rates for the individual’s taxable income.

Helping to understand the impact of taxes on withdrawals

The conventional wisdom for most retirees is to largely rely on their tax-deferred accounts – 401(k)s as well as Social Security benefits to fund their retirement lifestyles. But, some draw on their retirement assets in taxable accounts (Brokerage) first. Deciding how you use this combination of accounts to draw your income in retirement illustrates the impact that taxes have on withdrawals.

There’s a logic to drawing on your taxable accounts first. Leaving your tax-deferred accounts untouched means there’s more time for its value to increase. Doing it the other way around – taking income initially from tax-deferred 401(k)s - could mean your income is taxed at much higher rates.

Your clients could have more money to spend and have a healthy legacy to leave to their estate.

No Tax Planning

Using a simple illustration of a 5050 US Portfolio (US Aggregate Bonds and US Equities – Total Market) our client has $1.185m invested with an annual income requirement of $40k net of taxes.

The accounts are allocated as follows:

IRA: $100K

401(K): $650K

Brokerage: $335k

Roth IRA: $100K

The total fee across all accounts is 1% p.a. Using the extensive historical data over 100 years and withdrawing the income from her 401(k) and Traditional IRA account first, we have a:

• 73% success rate

• total cumulative expenditure of $981k (in the 10th percentile)

• legacy of £363k (in the 50th percentile scenario)

Maximising the after-tax value

Drawing on the taxable accounts first (Brokerage), followed by the Roth IRA, leaving the tax-deferred accounts last, gives:

• a success rate of 94%

• a cumulative lifetime income spend of $1.16m (in the 10th percentile scenario)

• more in the legacy (50th percentile) for your estate

Financial plans that want to optimise taxes based on the individual client’s needs should base income withdrawals on a selected withdrawal order across accounts. You should decide the exact amount to withdraw from each account at the beginning of the tax/planning year. You should also take dynamic spending and inflation rules into account.

In the illustration above, we’re left with more income, our success rate is much higher, and we have $436k more in legacy. Both illustrations have the same fee base, asset allocation, portfolio balance and income requirement. All we’ve changed is the withdrawal order, to see how the plan can be tax efficient.

If an account runs out of money during the year, simply take the income originally scheduled to come from here from the other accounts. Base this on your pre-selected withdrawal order. Income will be taxed according to the specific features of the account it’s come from.

Timeline’s modelling of US taxes helps to efficiently account for retirement taxes, keep income sustainable and ensure the client doesn’t run out of money.

Users can create different tax planning scenarios and assess the impact of taxes on their client’s retirement journey.

The system accounts for Federal taxes, but State and Local taxes aren’t yet modelled. We’re considering this feature.

This is just one of the many ways that Timeline helps advisors improve on the accepted wisdom of drawing down certain accounts. It helps users with detailed financial planning - especially how to take advantage of taxable income and leave a healthy legacy to a client’s estate by maximising the after-tax value of accounts.

For more information or to sign up for a 30 day free trial click here

Abraham is the Founder and CEO of Timelineapp. He has authored the Beyond the 4% rule book, written several industry papers and delivered many talks. He holds a master’s degree from Coventry University and an alphabet soup of designations, including the Investment Management Certificate, Chartered Financial Planner and Chartered Wealth Manager.


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