How a Year Works

FinZot projects a plan one year at a time. Each year it collects income, pays expenses, runs the actions you scheduled, settles the surplus or shortfall, pays taxes, and carries the ending balances into the next year.

The steps

The year starts by applying the year’s investment return: price growth plus the dividends and interest your holdings pay (returns and distributions). Balances grow to their year-end values before anything else happens, so every buy and sell in the year happens at year-end prices. Required minimum distributions are the exception. They are sized from the prior year-end balance, as the IRS requires.

1

Collect income

FinZot collects earned income, Social Security, pensions, and rental income. Earned income is prorated if a job starts or ends mid-year. It also collects the distributions your holdings pay: dividends, interest, and fund capital gain payouts. In a taxable account these arrive as cash and are taxed this year, whether or not you sell anything. In a tax-advantaged account they are reinvested where they are, so they are neither spendable nor taxed.

2

Pay expenses & minimum debt payments

Each loan accrues its interest and makes its required payment first. Living expenses are paid after that. The order decides what a formula reads: an expense sized by a formula sees debt balances with this year's payment already made, while an income sized back in step 1 sees them before it.

3

Required minimum distributions

FinZot takes the withdrawals the IRS requires from pre-tax retirement accounts. These start at age 73 to 75, depending on birth year. The first year's RMD can be delayed to the following year. The cash joins the rest of the year's income. Qualified Charitable Distributions are sized before any of this, ahead of step 1, because a QCD counts toward the RMD rather than adding to it; a formula sizing one sees the year's balances and none of its income or spending yet. The QCD sales themselves run in step 8.

4

HSA contributions

5

SEPP §72(t) withdrawals

A SEPP is a fixed multi-year schedule, not a choice you make each year, so it pays out on schedule alongside the RMDs above. While the schedule runs, its account is locked. Every step below skips it, except the very last step of the shortfall selling in step 10.

6

Asset Allocation Changes

Update Target Allocation and Allocation Glide Path entries give accounts a new target. One with Execute rebalance immediately also rebalances that year. A change is a setting, not a cash flow, so it runs before every move you choose to make. Each buy and sell from here down uses the new mix. Any gains a taxable rebalance realizes are on the books before any step-9 withdrawal or conversion is sized. The RMDs and SEPP payments above are already out, so they still sell the old mix.

7

Contributions

FinZot makes your employer plan and Solo 401(k) contributions. They come out of payroll, not the year's cash, so they run no matter how the year turns out. Pre-tax contributions lower the year's taxable income. Both kinds share one IRS deferral limit per person, so the order of this list decides who gets the room that is left. HSA contributions run earlier, at step 4. IRA, 529, and taxable investing are funded from surplus at step 10.

8

HSA Reimbursements & Qualified Charitable Distributions

HSA Reimbursements are tax-free withdrawals against the pool of unreimbursed qualified medical expenses you have tracked. Each entry uses up part of the pool, leaving less for the entries below it. Then the QCD sales run, for the amounts fixed at step 3. A QCD's proceeds go to charity, so the year's cash does not change.

9

Roth Conversions & Withdrawals

In this step FinZot runs the income moves you chose to make. They live in two lists, Roth Conversions and Withdrawals, and you order each list separately. A withdrawal can be pre-tax, taxable, or Roth & HSA, and it is sized one of three ways. Fixed amounts are committed first. Tax-targeted entries fill up to a tax bracket, an IRMAA tier, or an ACA threshold, sized against the year's actual tax bill. As needed entries wait for step 10 and take whatever spending still needs. A conversion moves money between accounts, so only its tax touches the year's cash. A withdrawal's proceeds become cash, covering taxes and spending before anything else must be sold. The full rules are on the Roth Conversions and Withdrawals page.

10

Settle the cash position

Everything above nets to one number: the year's surplus or shortfall. Its sign decides what happens next.

▲ Extra cash

The typical working year. The surplus runs through your Extra Cash Allocation Order: extra debt paydown, taxable investing, IRA or 529 contributions, optional spending. Each entry draws from what the ones above it left. Whatever is left after the list sweeps into the default account (below).

▼ Cash shortfall

The typical retirement year. FinZot sells to cover the gap in the three stages below, realizing capital gains as it goes.

11

Final taxes

Federal and state income tax, capital gains tax, IRMAA, and AMT are computed on everything the year actually did, including gains realized by step 10's selling. The whole bill is paid in the same year. It never carries into the next. Tax-advantaged accounts rebalance to their target allocation at year-end. Taxable accounts are never rebalanced on their own. The next year begins.

↻ Ending balances carry forward. Next year begins at step 1.

Order within a list

Several of these steps are lists you control: Asset Allocation Changes, Contributions, HSA Reimbursements, Qualified Charitable Distributions, Roth Conversions, Withdrawals, and the Extra Cash Allocation Order that spends a surplus. Each is a separate list. The step order above fixes the order between lists. Within a list, entries run top to bottom in the order you set. Each entry acts on what the ones above it left, so swapping two entries can change the result.

What an entry in each list can do is documented on the page for that list. See allocation, lots, and selling for allocation changes, and contributions, Roth basis, and the 5-year rule for contribution entries, extra cash allocation order for the entries that spend a surplus, and Roth conversions and withdrawals for conversion and withdrawal entries, including the tax targets and caps each one can carry.

Conversions and withdrawals are two lists, but the year runs them in passes across both. Each pass runs in list order:

1. Withdrawals with a fixed amount
2. Conversions with a fixed amount
3. Tax-targeted withdrawals
4. Tax-targeted conversions
5. As-needed withdrawals, at step 10

Fixed amounts commit first, so the tax-targeted fills that follow see the income they added. A conversion is the only entry that uses cash, for its tax, without raising any. So it is sized last, after every cash-raiser is committed. As-needed withdrawals run last, at step 10. By then the year’s shortfall is final. That is why they are the only kind that can pay the tax a conversion created in the same year. Which pass an entry runs in depends on how its amount is set, not on its position in either list.

Covering a shortfall

A shortfall is covered in three stages. First, any as-needed withdrawals you set. Then a proportional split of whatever those do not cover. Then a last-resort sequence for what the split cannot reach.

As-needed withdrawals (optional, you define them)

These are the entries in your Withdrawals list set to As needed. They are how you say what to spend first. Each one draws from the accounts you named, or from a whole tax-treatment group, and covers whatever is still needed when its turn comes. Every entry can cap the amount drawn per year and can be limited to a period of the plan. An entry stops when it has covered the need, drained its source, or hit its cap, and reports which. Most plans need none of these.

the rest is split proportionally

Proportional split (always on, nothing to configure)

Taxable and Traditional (pre-tax) accounts each cover a share of what is still needed. Each group's share matches its share of their combined balance. The shares are recalculated every year, from balances after the year's scheduled withdrawals and before any selling to cover the shortfall. The split is between the two groups, not between individual accounts. Within a group, one account is drawn down before the next is touched. Roth accounts, HSAs, and 529s are not in the split. HSAs and 529s are set aside for medical and education spending. The Roth is left for last because its growth is tax-free, so FinZot spends it only once the taxable and pre-tax money is gone. It is the first thing the last-resort sequence reaches, not a penalty tier.

and if that still is not enough

Last-resort sequence (always on, fixed order)

1Roth accounts whose withdrawals are penalty-freefree

2Roth contributions, where only the contributions are penalty-freefree

3Roth growth, where only the contributions were penalty-freepenalty

4HSAs whose withdrawals are penalty-freefree

5Roth accounts where even contributions would pay the penaltypenalty

6Traditional retirement accounts, paying the early-withdrawal penaltypenalty

7HSAs, paying the penaltypenalty

8529s, penalty-free before penalizedfreethenpenalty

9Accounts locked by a running SEPP §72(t), last of allfree

Color marks account type. Each badge marks whether that tranche is penalty-free.

How the shares are set. A group only counts what it could actually pay out that year. A group that runs dry or becomes unreachable drops out of the split rather than passing its share to the last-resort sequence. With only two groups, a year when the Traditional group is unreachable, for example before age 59½, is a year the taxable group covers on its own. The Roth is still reached only once that runs out.

• An account that would pay an early-withdrawal penalty counts as nothing. So does one locked by a running SEPP §72(t) schedule.
• Shares are of the cash you need after tax. Each group’s sale is then grossed up for its own tax, so a Traditional account gives up more dollars than its share suggests.
• An RMD already paid out counts toward the Traditional group’s share. It does not stack on top.
• A tax-targeted withdrawal counts toward its group’s share the same way. The target is a total. Fill to the top of the 22% bracket and that fill is the whole draw. The split does not top up the same accounts again behind it.
• A fixed-amount withdrawal is an addition. It reduces what the split has to cover but does not count as its group’s share. Take $50,000 from a Traditional IRA and the Traditional group still draws its full share of what is left. This is deliberate. A fixed amount is how you draw a group down faster than its share. An entry that only renamed dollars the split would have taken anyway would do nothing.

Published proportional-withdrawal backtests usually weight gross withdrawals instead of after-tax need. The difference shows up mostly in a year heavy in pre-tax withdrawals.

An as-needed entry is only worth writing to say what comes first. For example, “drain the inherited IRA as fast as spending needs it” or “spend the brokerage down through the bridge years.” There is no entry for “split it proportionally”. That happens on its own.

If all you want is to raise cash, set the withdrawal to As needed. You enter no amount. It draws what the year still needs and stops.

The same three stages set the size of every tax-targeted fill. FinZot measures each fill by running the rest of the year against it, so the stages decide how the fill’s own tax and the year’s remaining spending get funded. Changing the order, so that pre-tax comes ahead of taxable, changes how large the fill comes out. The order is fixed for the year before the first fill is sized, and per-year caps read balances from before any of the year’s selling.

Which withdrawals pay an early-withdrawal penalty, and the Rule of 55 exemption, are covered in Roth conversions and withdrawals. An account with an active SEPP §72(t) schedule is skipped, since its withdrawals are already scheduled. An account whose withdrawal would pay the penalty is skipped by as-needed entries and by the proportional split alike. It is reached only through the last-resort sequence. Within an account, allocation, lots, and selling covers how it keeps its target allocation and which holdings and lots a sale draws from. The realized gains land in the same year’s taxes.

Where surplus lands: the default account

Every plan has one taxable account marked as the default account. Think of it as your checking account and its brokerage sweep combined. It is the destination for every dollar no other rule claims. Surplus left after the Extra Cash Allocation Order sweeps in and is invested at the account’s target allocation. A second sweep after final taxes catches anything the exact bill frees up. A fresh plan starts with one, named “Default”, holding 100% VTSAX.

Cash never carries across years. There is no idle cash and no cash drag in the plan. That makes the default account’s allocation the plan’s default return on surplus. Every unclaimed dollar grows at it. If you actually hold cash, model it by putting a money market fund in the default account’s allocation. In every other way it is an ordinary taxable account. It holds tax lots, realizes gains when it sells, and gets no preference when a shortfall is covered.

Sizing matches the final bill

Sizing a Roth conversion, a withdrawal, or a shortfall sale runs into a circular problem. The tax the move creates changes how much cash is left, which changes the right amount to convert or sell. FinZot sizes each move against the same tax the year ends with, not a separate estimate. A fill aimed at a bracket or IRMAA edge lands on that edge in the final numbers. Those numbers already include the capital gains a step-10 shortfall sale realizes and the extra Social Security that income makes taxable. What the fill assumes and what step 11 bills are the same. Why the whole bill settles inside the year, and what that means for the cash view, is covered in income taxes.

The Spending shortfall cap applies the same rule to cash rather than income. It holds a pre-tax or taxable withdrawal to the shortfall the year would actually end with, measured through the same stages and the same tax bill. Paired with a bracket fill, it funds spending from pre-tax up to that bracket and no further. A year that ends in surplus draws nothing. It only caps a fill and sizes nothing on its own. A conversion cannot use it, because a conversion raises no cash and never funds spending.

The one exception is surplus reinvestment. When an Extra Cash entry carries a tax effect the year has not booked yet, such as a pre-tax contribution’s deduction, it is sized against an estimate. A second sweep after the final bill reinvests whatever the lower bill frees.