Data Entry: Income Distributions
Adding Income Distributions & RMD's
One of the options on the Profile > Income > Add Income screen is to enter specific distributions from client accounts. This article dives into that particular feature in detail.
Additionally, income distributions can be added directly to a proposed plan within the Retirement > Analysis module. This allows for an easy comparison of scenarios with different distribution strategies. For more information on adding income distributions into the Retirement > Analysis module click here.
By default, when funding a cash flow deficit, RightCapital will take money from taxable accounts first, and tax-advantaged accounts later.
To illustrate a specific distribution from different types of accounts, use income distribution cards. When a distribution is created, RightCapital will automatically take money from the accounts specified and distribute them to the client's cash flow.
The assets distributed from one account to the client's cash flow is reflected in the Planned Distribution column on the Cash Flows summary page.
When adding income distributions users can specify the method of distribution with four different approaches.
Fixed dollar amount: This allows the user to enter a fixed dollar amount that can be distributed over the designated start and stop years.
"% of start year acct. balance": This allows the user to enter a percentage of the start year account balance. We will calculate that percentage of the ending account value in the year the distribution starts, and distribute the same amount every year.
- For example, if a 10% distribution from IRA accounts starting in 2030 is specified, and the 2030 IRA balance is $300,000, we will distribute $30,000/yr starting in 2030. An annual increase can be added to increase that amount by a flat % each year.
"% of annual acct. balance": This allows the user to enter a percentage of the annual account balance. We will calculate that percentage of the ending account value in each year of the distribution. This amount distributed each year can change based on the account balance.
- For example, if a 10% distribution is specified from 2030-2032, we will distribute 10% of the 2030 ending balance in 2030, 10% of the 2031 ending balance in 2031, and 10% of the 2032 ending balance in 2032.
"Deplete over # years": This allows the user to enter a number of years over which the entire account will be depleted. We will calculate a distribution beginning in the start year, such that the total balance is depleted in the number of years specified. Each year the distribution will be based on the number of years remaining until depletion
- For example, if there are 10 years left, 1/10 of the value will be distributed; if there are 4 years left, 1/4 of the value will be distributed.
Identifying the type of account
In order to successfully distribute the assets, the owner and type of account have to match the investment account that is set up on Profile > Net Worth.
Use the drop-down boxes to select the Owner and type of account:
- Distributions are funded from buckets of assets owned by each client rather than specific accounts.
- Deferred Compensation distributions will distribute from the non-qualified pension accounts.
- Distributions from annuities are only allowed if the distribution type on the annuity is Regular withdrawals. For more information, see the Annuities article.
Conversion/Rollovers and Taxation
You can use the ' Type' drop-down box to illustrate certain scenarios where assets transfer between different types of accounts, as opposed to being distributed to fund cash flows or be saved in the taxable account.
Normal distribution will distribute the assets from the specified type of account and apply standard taxation (subject to the selection in the 'Taxation' drop-down box. The amount will be distributed into cash flows and any positive net cash flow due to the distribution will be saved into the taxable account.
Use the Convert to Roth IRA option to illustrate Roth conversions from IRA / 401(k) / Roth 401(k) accounts. Assets will be converted to a Roth IRA account. For more information, see the article on tax distribution and conversion.
Use the Rollover to IRA option to illustrate rolling money from a 401(k), Qualified Pension, or Qualified Annuity (regular withdrawals only) account to an IRA account. Use the Rollover to 401(k) option to illustrate rolling money from an IRA, Pension, or Qualified Annuity (regular withdrawals only)account to a 401(k) account. These options have no tax ramifications.
Net Unrealized Appreciation allows you to illustrate the impact of selling appreciated company stock in clients’ 401(k) or other defined contribution plans via a rule referred to as “Net Unrealized Appreciation” (NUA). The NUA strategy cannot be spread over multiple years as they require the entire account to be distributed. If advisors are splitting distributions between an NUA and Rollover IRA then two distribution cards should be entered for the same account type and owner during the specified calendar year.
To create an NUA strategy, use the following steps.
- When entering an Income Distribution card on the Profile / Income screen, you can select “Net Unrealized Appreciation” under the ‘Type’ drop-down box
- You can then enter the ‘NUA cost basis’, which is the original basis of the shares to be sold, along with the amount
- The amount entered as ‘NUA cost basis’ will be taxed as ordinary income, while the gain (difference between the amount and the cost basis) will be taxed as long-term capital gains
- The total amount will be distributed into cash flows and any positive net cash flow due to the distribution will be saved into the taxable account.
- Only the distribution from company stock should be entered as an NUA distribution; if the client is liquidating a 401(k) account that includes stock and other assets, they should enter two distribution cards
- You can only illustrate NUA distributions if the ‘From account’ type is “401(k) accounts”
Use the Taxation drop down to indicate how the distribution should be taxed:
Standard rule means that the distribution will be taxed normally.
Penalty free means that the distribution will be taxed but the 10% penalty, if otherwise applicable, will be waived. This can be used to illustrate items like 72(t) distributions.
Tax free means that the distribution will not be taxed. This can be used to illustrate items like charitable distributions from a 401(k).
Distributions and RMDs
For distributions from IRA, 401(k), Roth 401(k), Qualified Pensions, and Inherited IRA accounts, control how the distributions interact with the required distributions that are automatically calculated by RightCapital. To update the setting for a specific client, in the main advisor portal select their name in the client list and click on the 'Settings' tab.
For more information, see the article on how to change planning settings on a client-by-client basis: planned distribution settings.