Not a comment on the last post, but more in regards to the original post... I find the Growth Taxation input also confusing, you can tell just by reading this post back and forth. A suggestion might be... it is very likely that many users of the tool have Boglehead-like assets, i.e. VTI, VXUS, BND i.e. a conventional 3 fund portfolio. It would be useful if someone knew the actual data for these 3 for 2023, and 2024... and showed the proper values and how they were calculated in an Excel spreadsheet table. These would show a few examples, of actual data and a reality check for newbies trying to input data correctly. By adding in Muni Bonds, and Cash to the table that would give a pretty complete example set for people to refer to.
Brad Here's the link to the spreadsheet I used for myself. as a google doc to calculate % growth taxation qualified vs ordinary dividends to enter into Pralana. I plan on updating it every year when I enter updates to my balances in Pralana. (You can make your own copy or download it into excel.) Apologies I didn't make it pretty cause it's just for me; but it does contain specific info on the vti and vxus funds you mention. (I also include vanguard small value index cause I happen to have it in taxable.) I basically used Richard's methodology endorsed by Pralana, but used the SEC yield and/or TTM (Trailing Twelve Month yield) as found at Morningstar for my total yield, and used a four year average qualified %, rather than how Richard did it. My spreadsheet didn't include BND or Cash because are mostly all yearly interest/ordinary dividends.
Or are you asking for an example of the actual growth taxation screen? Even with the same data, the results depend heavily on your total expected return estimates. FWIW, I've attached a screenshot of what my taxation growth entry screen looks like for this year for equity, bond, cash. But I have a bit of a hodge podge in taxable stocks (due to a small amount of value funds) and have conservative return estimates, hence probably have an atypically large % ordinary income with taxable equities. I also have some vanguard lifestrategy fund in my Cash emergency fund, in case you're wondering why I have some qualified dividends and ltcg there.
The question is a little too open-ended for me to answer. Pralana's primary assumption about stock dividends is they move proportionally with the stock price. In any given year, they don't really do that as stock price may swing due to euphoria or panic. But stock prices do represent something about profitability expectations and therefore companies' long term ability to retain or raise their dividend. So assuming dividends are proportional to growth is mostly OK in the long term.
The secondary assumption Pralana makes is that the ratio of long term and short term capital gains remains constant. That's been a pretty good assumption for the ETFs I hold and you could check some past 1099s to see if it's true for your funds. Several years ago I had some mutual funds that paid out all kinds of gains (as others redeemed shares, everyone gets gains). I think this was 2018 and I got hit with lots of gains even though the funds lost value that particular year. I was not happy as that was my highest earning year of my career and did not want a bunch of long and short term capital gains piled on top. The only good news was that it made it easy to get rid of that investment as I'd already paid the capital gains.
Thank you Jonathon for your reply I will take a look at the spreadsheet when time permits, I am sure it will be helpful. The export control issue side of the tariff situation has consumed essentially all of my free time the last few weeks (still work a full time job 😀 ).
Hi and great question. Why Form 1040 Line 3a and 3b are the same is asked from time to time. The reason is that qualified dividends are a subset of ordinary dividends. The IRS 2024 instructions for Form 1040 line 3a says:
"Enter your total qualified dividends on line 3a. Qualified dividends are also included in the ordinary dividend total required to be shown on line 3b."
There are additional types of dividends that are also included in line 3b and which are taxed as ordinary income. But Pralana does not provide a way to input these. I recently modified the Growth Taxation page to say: "Growth Taxed as Interest/Ordinary Income" which would be where non-qualified dividends and interest should be entered. This amount is shown in Pralana on Form 1040 line 2b which now has a Metric MRI. Click the amount on Line 2a or 2b and you will see an itemization of the various interest income sources.
The most recent release added an FAQ page under More > Resources. I have added this question and answer in the FAQ Taxes section, #2.
Regards,
Charlie Stone, Pralana
Here's what I do:
I look at last year's 1099 to get the qualified and non-qualified dividends as a percent of the average account value. Then I divide those by my projected nominal rate of return. So last year, our stocks had about 2% total dividends, 1.6% qualified and 0.4% non-qualified. So I divide each by my projected nominal rate of return for stocks (5% real + 3% inflation), giving me 1.6/8 = 20% qualified dividends taxed as capital gains, 0.4/8 = 5% non-qualified dividends taxed as ordinary income and the remaining 75% is taxed as capital gains when sold.
I understand Richard's math above. After playing with pralana and reviewing different tabular projections, I'm trying to understand the dividend payouts (aka Growth taxed as ....). It isn't making sense to me.
Assume the number of shares in this fund stays constant. Implying no reinvesting of dividends.
Let's say this year my account grows by $100,000. That would be (20%) $20,000 qualified dividends, (5%) $5,000 non-qualified.
Anytime in the future, if for a given year, the account grows by $500,000, That would be (20%) $100,000 qualified dividends, (5%) $25,000 non-qualified.
Are those assumptions correct?
I thought mutual fund dividends were paid out per share. But the above and what I'm seeing in pralana suggest it's based on $growth.?.? Or do I just not understand how dividends work? 🙂
Pralana is assuming that the ratio of dividends growth to share price appreciation will remain constant over time. That's not unreasonable since as profits go up, it drives up both dividends and the share price and in a recession, both will fall. In any one year, the relationship will not be perfect, but the tool needs some kind of way to estimate taxes in the future.
Mutual Funds and ETF do pass through dividends to investors, but the dividends on enough of the underlying stocks go up each year due to profit growth that the overall relationship holds.
Matt, you are correct. Interest and dividend income tend to be much more correlated to asset balance than to asset growth. This item is on the list of modifications for future releases. Please Visit More > Resources > Feature Voting and vote to help prioritize the list.
Can I ask a related question. What should I use in case on I bonds? It is taxed as ordinary income but only when withdrawn. What about TIPS, for now I set them up as "Growth Taxed as Interest: Federal Only" but for me they belong in PreTax 401k account. So will Parlana handle that correctly as they are simply income?
For things in your pretax 401K, I would just treat them as ordinary bonds.
If you have I-bonds in taxable, it's not built to handle them perfectly. I thought you should be able to use the Personal Loans module and enter the amount and interest rate, set the monthly P&I to zero and then use the Early Payoff date as the end date. But that seems to have a bug and the money moves at maturity but the taxable income doesn't reflect the accrued interest. I just reported that as it seems like a bug.
There was some discussion with Charlie a few months ago about making a module that better handled I-bonds and TIPS, but it seems to have slipped down the priority list. I recommend you request a feature improvement to help you as you are not alone in holding I-bonds and TIPS.
Can I ask a related question. What should I use in case on I bonds? It is taxed as ordinary income but only when withdrawn. What about TIPS, for now I set them up as "Growth Taxed as Interest: Federal Only" but for me they belong in PreTax 401k account. So will Parlana handle that correctly as they are simply income?
I'm in the same situation. For now I have treasury bonds (including TIPs) as their own asset class with "Growth taxed as interest" like you do. That works because treasuries give off interest each year. I couldn't find a way to fit Ibonds into the growth taxation categories, so I use "windfall income" with each year of maturing ibonds having their return of principle listed as non-taxed and their interest as taxed (So each year's worth of ibonds gets two entries.)
Thanks guys.
@jkandell I modeled i-bonds as a pension based on this comment from @jlee, similarly splitting the amount into the untaxed basis the taxed appreciation. @jkandell's approach seems simpler and maybe strictly better. A downside of modeling as one or more pensions is that you are limited to 5 distinct pension end dates (10 with a spouse).
@ultasam49
"Add Fixed Income Assets feature" is the 4th highest voted feature at More > Resources > Feature Voting. Please cast your votes, if you have not yet!
Description: "Add a new feature to support holdings of Fixed Income Assets. These assets would be held outside the current account structure and, like a Personal Loan, would include a cash outlay to purchase the asset followed by an annual income stream and possible future return of capital." We will include a variation of this for I-Bonds.
@ultasam49
"Add Fixed Income Assets feature" is the 4th highest voted feature at More > Resources > Feature Voting. Please cast your votes, if you have not yet!Description: "Add a new feature to support holdings of Fixed Income Assets. These assets would be held outside the current account structure and, like a Personal Loan, would include a cash outlay to purchase the asset followed by an annual income stream and possible future return of capital." We will include a variation of this for I-Bonds.
Done. Thanks.
