FUNCTIONAL DOCUMENT: ASSET ASSIGNMENT AND DISTRIBUTION ORDER

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1 ZYWAVE FUNCTIONAL DOCUMENT: ASSET ASSIGNMENT AND DISTRIBUTION ORDER Profiles Comprehensive R Detailed Cash Flow R FUNCTIONS ADDRESSED IN THIS DOCUMENT: How do the selections made on the Asset Distribution screen affect the case? How do the selections made on the Distribution Order screen affect the case? Asset Distribution and Distribution Order screens (in the asset planning category) Distribution plays an important role in the success of a client s financial plan. Asset distribution allows you to allocate the assets used to fund your clients goals and objectives. The distribution order allows you to specify the order in which those assets are redeemed when the goal or objective begins. When multiple assets assigned to the same goal have the same distribution order, Profiles liquidates the assets proportionally. In Comprehensive and Detailed Cash Flow analysis modes, both asset distribution and distribution order options are available. In Express mode, only asset distribution is available, and the distribution order default of Defer Income Taxes is used. This document was created using the Comprehensive mode, with tax-sensitivity selected. Other sources on this topic: Retirement: Qualified Plan Preferences and Plan Limits TF W zywave.com 1

2 How do the selections made on the Asset Distribution screen affect the case? The selections made on the Asset Distribution screen can significantly affect the success of clients goals and objectives. For portfolio assets such as investment accounts, Profiles only uses assets specified to meet the goal. On the Asset Distribution screen, you can indicate for which analysis objectives the clients portfolio assets should be available. For events such as retirement, assets are available by selecting the Retirement check box, whereas for goals such as education, assets are reserved by selecting the goal from the list. While a portfolio asset can be available for multiple events, it can only be reserved for one goal. For example, an investment account could be reserved for education and available for retirement. In this example, the investment account would not be available to fund the clients retirement need until after the education goal had been met. When an investment account is reserved for an education or accumulation goal, Profiles attends to the goal prior to the retirement and/or survivor event regardless of which takes place first. In cases analyzing retirement and survivor needs, all portfolio assets (with the exception of education investment accounts) default to available At Retirement and When Client A/B Dies. This makes the assets available for unmet needs during retirement and in the survivor analysis. In cases where the clients retire in different years, the investment accounts owned by both clients are available for retirement when the first person retires. For education investment accounts, UTMA/UGMA accounts are automatically reserved for education, but can also be made available for retirement and survivor needs; 529 plans and Coverdell ESA accounts are only available for education. DID YOU KNOW? Clicking Designate Key Assets on the Asset Distribution screen allows you to designate an asset to receive surplus income and lump-sum payouts; the same asset can be selected for both. Only assets available at retirement and death, which are not reserved for a goal, are listed. Designating an asset to receive surplus income is important to the survivor needs and retirement analyses so that the asset receives excess income, including required minimum distributions (RMD), after total needs are met. The lump-sum asset receives payouts from life insurance at first death, lump-sum income sources, proceeds from the sale of hard assets, and future loans. Depending on the analysis objectives, if you click Client Presentation prior to designating key assets, a warning message appears and Profiles designates the first eligible asset. On the Asset Distribution screen, you can apply financial strategies to hard assets such as the clients home and real estate by choosing to hold or sell an asset. By default Profiles holds hard assets, but you can enter sell strategies by clicking the button beside the asset to enter the sale details, such as timing and sales expenses. For example, in situations where clients are unable to meet their retirement needs but have significant equity in their home, you can use the Asset Distribution screen to model a downsizing of the clients residence. Profiles invests the difference in the lump-sum asset, which is available for retirement income needs. To understand how asset distribution works, we will look at the case of Frank and Kathy. Example: Frank and Kathy have invested well and plan to retire in eight years, when they are both 55 years old. They have a son, Bobby, who plans to attend college in 11 years. They expect Bobby to go to college for four years at an average cost of $7,500 per year in today s dollars, indexed at 6%. Frank and Kathy have 401(k), Roth IRA, and other investment accounts which are available at retirement. In addition, they have $150,000 in an investment account which is reserved for Bobby s education and available for retirement. TF W zywave.com 2

3 Recommendations category Retirement Scenarios section Add Scenario button The selections on the Asset Distribution screen ensure that after Bobby finishes college, any amount remaining in the investment account after Bobby s college goal has been funded is then made available for Frank and Kathy s retirement needs. When we review the Asset Timeline for Retirement output page for Bobby s college fund, we can see the effects of the asset distribution settings. Even though Frank and Kathy are retired as of age 55, Profiles only withdraws for retirement income needs from Bobby s college fund after he has finished college. DID YOU KNOW? If an account has multiple holdings, selecting Manage Underlying Holdings Independently on the Account Entry screen (available by clicking Edit on the Assets screen) allows you to assign separate holdings to separate objectives. When selected, the holding name and not the account name, appears on the Asset Distribution and Distribution Order screens, and Profiles treats each holding as a separate account. TF W zywave.com 3

4 How do the selections made on the Distribution Order screen affect the case? The Distribution Order screen allows you to choose a strategy for liquidating your clients accounts. You can choose between predefined strategies that will either defer income taxes or reduce income in respect of a decedent (IRD) at death, or select a custom order in which you manually enter the order in which each of your clients assets is to be distributed. Strategy Defer Income Taxes (default) Reduce IRD at Death Custom Order Goal and description The goal of the strategy is to extend the length of the clients portfolio. This strategy is often suitable for clients at or nearing retirement who require their portfolio to last a number of years. This is an automatic strategy where Profiles defers the payment of income taxes by sorting the assets in the most tax-advantaged order possible. The goal of the strategy is to reduce the IRD tax payable at death. This strategy is often suitable for clients who are nearing the end of their life expectancies and still have a significant portfolio. Using automatic sorting, Profiles ensures that assets which might pose an income tax problem to an estate or family are liquidated first. The goal of this strategy is to allow you to meet the personal criteria of the clients. When selected, Profiles liquidates the assets in the following order: 1. Bank accounts (checking, savings) 2. Investment accounts (state taxable, federal taxable, federal and state taxable, tax free, stock options) 3. Deferred annuities 4. Roth IRA 5. Qualified (non-deductible, deductible) 1. Bank accounts (checking, savings) 2. Qualified (non-deductible, deductible) 3. Deferred annuities 4. Investment accounts (state taxable, federal and state taxable, federal taxable, tax free, stock options) 5. Roth IRA In the order specified by the client When using a predefined strategy with multiple accounts of the same type, or when using a custom order with multiple assets with the same distribution order number, Profiles proportionally withdraws from each asset to ensure an equal conversion to income from each source. In cases where the clients have qualified accounts or retire prior to age 59½, Profiles may ignore the distribution order specified. For qualified accounts with required minimum distributions, Profiles continues to calculate and pay out the RMD and any associated tax. In addition, when the clients retire prior to age 59½, Profiles only redeems from the qualified accounts when the Allow pre-59 ½ withdrawals from qualified assets when needed check box is selected on the Planning Preferences category Qualified Plan Preferences screen. By default this check box is cleared and Profiles skips over these assets until the clients reach age 59½. When we review the Retirement Withdrawals Timeline output page, which excludes RMDs, we can see the effects of the selections made on the Distribution Order screen. This output page shows, year by year, the amount redeemed from each account type, any income tax associated with the withdrawals, and finally the net withdrawal amounts. TF W zywave.com 4

5 On this output page, when using the default selection of Defer Income Taxes, and without making the qualified accounts available prior to age 59½, we see that, in the years prior to age 59½, Profiles redeems Frank and Kathy s available investment accounts, and then at age 59½ redeems their Roth IRA accounts. When Bobby finishes college, the remainder of the college savings is available and used for retirement. Lastly, Profiles redeems their qualified accounts. By using this ordering, Frank and Kathy defer income tax until age 69. DID YOU KNOW? Only vested stock options that have a Hold strategy appear on the Distribution Order screen. TF W zywave.com 5

6 When Reduce IRD at Death is selected, the Retirement Withdrawals Timeline output page shows Frank s and Kathy s investment accounts being redeemed first, then when they reach age 59½ their qualified accounts, followed by their remaining investment accounts, and lastly, their Roth IRA accounts. In this scenario, Frank and Kathy start to incur income taxes at age 59. This document is the exclusive property of Zywave LP and (or) its affiliates (collectively, Zywave ), and is protected by copyright laws. The information contained in this document is proprietary and confidential to Zywave. Copying or otherwise reproducing, modifying, revising, or extracting portions of this document for use in other documents is strictly prohibited without the express written consent of Zywave. Zywave shall not be liable for any loss or damage suffered by you or your customers as a result of any modifications, revisions, or extractions of portions of these materials and the insertion thereof into other documents made by you. NaviPlan is a registered trademark of Zywave. NaviPlan is licensed with the understanding that Zywave is not engaged in rendering legal, accounting, or other professional advice and, if any such advice is required, the services of a competent professional person should be obtained. TF W zywave.com 6