Account Types

Account Types

The portfolios that you model in Income Lab plans can be made up of a number of investment accounts. Each investment account has an account type that differs in how tax and distribution rules apply.

Income Lab supports the following account types:

1. Taxable

Qualified Tax-Deferred Account Types

1. Traditional IRA
2. SEP IRA
3. SIMPLE IRA
4. Traditional 401(k)
5. Traditional 403(b)
6. Thrift Savings Plan
7. Governmental 457(b)
8. Qualified Annuity

Qualified 'Tax Free'* Account Types

1. Roth IRA
2. Roth 401(k)
3. Roth 403(b)
4. Roth Thrift Savings Plan
5. Roth Annuity

Inherited Account Types

1. Inherited IRA/Ret Plan
2. Inherited Roth Acct
3. Inherited NQ Annuity

Other Account Types

1. Non-Qual Annuity
2. Non-Qualified Deferred Comp
3. HSA
4. 529

Most of these account types allow further specification of account characteristics so that your plans properly account for differences in premature withdrawal penalties, availability of funds for Roth conversions, RMD rules, etc. Below we outline how these accounts work and how to enter your account data correctly.

Account Type Characteristics

Retirement accounts vary in how various rules apply.

• Withdrawal penalties: Taking funds before age 59.5 may result in a 10% penalty (25% in the case of SIMPLE IRAs that have not been open for 2+ years)
• Age 55 exception: The 10% penalty may not apply if an account owner separates from service in or after the year they turn age 55
• RMDs: Required distributions based on age. Currently, RMD ages are 73 or 75.
• Still-working exception: Except for those who own more than 5% of a plan sponsor at normal RMD age, those who are still working for a plan sponsor do not have to include this account in RMD calculations until they have left the employer.
• Age 59.5 in-service withdrawals: Some plans must allow in-service withdrawals once the participant reaches age 59.5

The 'Qualified Annuity' account type is treated the same as a Traditional IRA account. The 'Roth Annuity' account type is treated the same as a Roth IRA.

Taxation by Account Type

Taxable

Taxable accounts can produce taxable income in any year, even if withdrawals are not taken. This taxable income can be in the form of interest, dividends (qualified or ordinary), and capital gains. The actual taxes modeled for accounts of this sort will depend on the account's asset allocation and your asset class tax assumptions, which include assumptions about how much of each year's gains are in each category (and how much of each year's gains are to be treated as unrealized).

Qualified Tax-Deferred, Inherited IRA/Ret Accts, and Non-Qual Deferred Comp

Account types listed in this category above are treated as having no taxation due unless a withdrawal is made.

Qualified Tax-Free* and Inherited Roth

Account types listed in this category above are treated as having no taxes due even when withdrawals are made.

Non-Qual Annuity and Inherited Non-Qual Annuity

Non-Qual Annuity account types are taxed only when withdrawals are made. (When no withdrawals are made, these accounts have tax deferral.) Withdrawals are treated as 'gains first' and gains are taxed as ordinary income. To be taxed 'gains first' means that withdrawals are treated as gains up to the amount of gains in the account. Any withdrawal of basis is tax-free. For example, if a $100,000 non-qual annuity has a basis of $95,000 and a $6,000 withdrawal is made, $5,000 of that withdrawal is gains taxed as ordinary income and $1,000 is tax-free return of cost basis.

HSAs

HSA accounts are treated as tax-deferred, with qualified withdrawals (those taken to pay for medical expenses) treated as tax free. Withdrawals taken from age 65 on that are not used to pay for medical expenses are treated as if they were IRA withdrawals and are taxed as ordinary income. This sort of non-qualified withdrawal taken before age 65 may have a tax penalty of 20% applied.

529s

529 accounts are treated as tax-deferred, with qualified withdrawals (those taken to pay for qualified education expenses) treated as tax free. Withdrawals taken for other reasons are taxed on withdrawn gains and a 10% penalty may also apply to these withdrawals of gains. (Withdrawal of basis is not taxed.)

Account Type Settings

Excluded from Roth Conversions

Users may mark as 'Excluded from Roth Conversions' any account that can in principle be a source of Roth conversion funds.

You will find the blue Account and distribution settings specification below the Account Type drop-down menu, after clicking the gear icon (⚙) next to the account for Traditional IRAs and SEP IRAs:

View this article for more details on Distribution Settings.

Allow In-Service Withdrawals

Some plans may allow participants to access funds even while they are still working and even when they have not yet reached age 59.5. You can select 'Yes' on This plan allows in-service withdrawals to allow access to the funds in this plan.

Note that premature withdrawal penalties (e.g., pre-59.5 10% penalty) can still apply to these withdrawals, so the practical importance of this option for those who have not yet reached age 59.5 is to allow Roth conversions from such a plan before separation from service.

Separation at Age 55+

If a plan participant stops working for a company in or after the year he or she turns age 55, no 10% penalty applies to withdrawals from the plan, even before age 59.5. Checking 'Yes 'on Stopped working for this employer in or after the year account owner turned 55 will free up account funds for all uses, both as a source for Roth conversions and as a source for living expenses.

*Note: This option will not appear for account owners who have not yet reached age 55.

Still-Working Exception

If someone continues to work for a plan sponsor then that account's balance is not taken into account for RMD calculations, even if the normal RMD age has been reached. An exception to this exception is that those who own greater than 5% of the plan sponsor when they reach normal RMD age do have to include the account balance in their RMD calculations. If this exception to the still-working exception applies, be sure to 'Yes' on Account owner will own greater than 5% of this employer at normal RMD age.

Note that you will not see this option for governmental plans (Thrift Savings Plans, Governmental 457(b)s) or for accounts that do not have RMDs (Roth accounts).

SIMPLE IRA 2-Year Rule

Funds withdrawn from a SIMPLE IRA within the first two years that the account is open will be subject to a 25% penalty if the account owner is under age 59.5. For SIMPLE IRAs within this 2-year window, please be sure to specify the month, then the two-year requirement will have been satisfied.

Non-Qualified Deferred Compensation

If you specify an account as "Non-Qual Deferred Comp" you should click the blue Employment and distribution settings link and specify how this account (or tranche of account) is to be distributed.

Non-qualified deferred compensation accounts/tranches can be distributed in a lump sum or in installments. Installments have a begin date ("Next Installment") and a final date ("Final Installment"), as well as a frequency (every X year(s)/month(s)).

If you have a non-qualified deferred compensation plan with a complex set of distributions, you may have to enter these as different accounts in Income Lab, each with its own distribution plan.