How to change a plan's portfolio distribution method

Distributions from investment accounts in Income Lab plans can be controlled in three ways:

1. Via the plan's "Portfolio Withdrawal Order"
2. Via an individual account's distribution settings
3. Via expense-matching for specialized accounts like HSAs and 529s

Set a Plan's Portfolio Withdrawal Order

To change the plan's portfolio withdrawal order, click on the gear icon and click the three-dot menu and select Advanced Settings, then open the Taxes section.

You can set the "Tax Strategy" to:

1. Pro Rata: Withdraw funds in proportion to the accounts' balances, taking larger withdrawals from larger accounts.
2. Order by Tax Treatment: Withdraw funds in a "waterfall" based on their tax status (taxable, tax-deferred, tax free), first exhausting accounts of the first type before moving on to the next tax type.
3. Bracket Management: Overlay Roth conversions on top of a Taxable > Tax-Deferred > Tax-Free withdrawal order. Roth conversions will apply in any permitted year if there is space within the specified target Federal ordinary income tax bracket. Otherwise, no Roth conversions will be applied that year.

For Tax-Ordered, you can drag and drop the three tax statuses into the order you prefer:

For Bracket Management, choose a target ordinary Federal income tax bracket from the drop-down menu. (Note that if you are applying TCJA sunsetting, the target account will shift in 2026 to the "corresponding" post-sunset bracket.)

Now click "Save" in the lower right of the Taxes section and return to the plan.

You can also set the plan's withdrawal strategy from the Tax Lab by clicking "Apply the selected strategy to this plan":

Set an Account's Distributions

Certain account types require their distributions to be specified at the account level. The following account types require these settings:

1. Non-qualified Deferred Comp
2. Inherited Retirement Accounts
3. Inherited Roth Accounts

The plan will reflect withdrawals from these accounts as specified in the account's "Distribution Settings".

Specify the next and final installment dates and the frequency of distributions and the software will reflect distributions from the account in a way that matches "stretch" calculations mandated for certain inherited accounts by the IRS. For example, if an account is specified to distribute funds annually in January over five years, in the first year of distributions 1/5 of the account (based on the account's December 31 balance) would be distributed, followed by 1/4 the next year, 1/3 in the year after that, 1/2 in the next year, and 100% in the fifth year.

If you are specifying stretch distributions from an inherited account, you may need to consult IRS Table I to find the required distribution period. However, this method also models distributions from other account types that don't require stretch distributions, including non-qualified deferred comp plans.

Expense-Matching to Specialized Accounts

Distributions from the following account types a preferentially matched to itemized expenses of particular types.

1. Health Savings Account: Matched to "Medical" expenses
2. 529 Account: Matched to "Education" expenses

Expense "Types" can be set for both Baseline and Other/Variable expenses using the "Type" dropdown menu.

Distributions from these account types will be ordered so that funds can be used to pay for planned medical or education expenses.

HSA funds can also be used as IRA funds after age 64, but HSA funds will not be used in this way if they are needed for later planned medical expenses. Funds from 529 plans are not used for non-education expenses unless the 529 has the last available investment balance in the plan at a given point.