Asset Class Taxation
I've been a PRC user for 7 years now and love it. Happy to see this forum for users.
A persistent short-fall for me has been the Asset Class Taxation tables. I've experimented with different values and seen, as the manual states, that "determining the percentages to plug into the taxation table can be non-trivial." This has a very big impact on my projections. But I find the manual's instructions on how to determine the values to be completely overwhelming. What does "dig into our records and determine the specific dollar amount of interest and NQ dividends, . . . " mean? What records? And how would I determine these amounts? My wife and I each have our own brokerage accounts, and at this point (just retired) the total value of the two accounts is 34% of our net worth, so this is not a trivial issue. Is there a simpler way of estimating these numbers or are there "default" values that might be close enough for most investors, or perhaps a simplified estimate based on asset allocation?
By records, I mean the document (either on-line or maybe an annual statement from your brokerage form) that identifies your assets and the performance of each of those assets. That will probably include cost basis, current market value, dividends and interest paid.
Then, you need to group your assets (in the on-line statement) to be consistent with the asset classes you've entered into PRC to enable you to determine the manner in which the growth of these assets is taxed. To keep this simple, let's say you break them into just three classes: money markets, stocks and bonds. This is pretty close to what I do myself. Staying with simplicity, you could just assume that all growth of money markets and bonds is taxed as simple interest. And for stocks, you could just assume it's all appreciation or maybe a small percentage of dividends and the rest appreciation (unrealized capital gains). The statements from your brokerage firm should be consulted to confirm that these choices are fairly good estimates.
I'm not an CFP so cannot advise you on good default values to assume. Hopefully someone else will lend their expertise to better flush out a good answer for you.
To add to this, keep in mind that any distributions from traditional retirement accounts are taxed as regular income, so the rate would be whatever you anticipate your effective (not marginal) tax rate to be. In Roths, you aren't taxed, of course. In non-retirement accounts (personal brokerage), as Stuart said, money markets and bonds produce interest income, taxed as income.
For dividends paid out by stocks/funds, it's a little more complicated. If you've held those securities less than a year, they're short-term gains/losses, and treated like regular income. If you've held them longer than one year, they're treated as qualified, or long-term gains/losses, and subject to the much more favorable long-term gains tax tables (most people are in the 15% bracket).
You only experience these stock/fund gains/losses when you sell the investments. The kicker is that if the fund managers are buying/selling within the funds you own, you are actually selling, perhaps unbeknownst to you 🙂 Those are the 'unrealized gains/losses' sitting in the funds, and you should see those on the statements or summary online. You will get a 1099 and be taxed on those gains, or can write off the losses (up to $3,000/year with carryover available).
This is why it's important to watch out for funds with high turnover rates in non-retirement brokerage accounts (morningstar.com shows this stat). And why I'm a fan of index funds - very tax favorable, since there's very little turnover, and super-low expenses.
Financial Counselor/Retirement Planner
Money Coach Group, Inc