Returns and Distributions
Every fund in FinZot’s catalog ships with a default annual return drawn from the fund’s own real history: decades of a specific fund’s actual year-by-year results, carried forward into the projection. Each projection year FinZot splits that return into two pieces with different tax lives. Price growth rides inside the holding untaxed until a lot is sold. A distribution is dividends or interest paid out as cash and taxed the year it lands. This page covers where the default comes from, how the split works, how each distribution type is taxed, and which funds carry a cost basis. Replacing any of these rates or the tax mix is covered in asset return overrides.
Where the default comes from
Section titled “Where the default comes from”A fund’s return series is real historical data: the actual year-by-year total returns of a specific fund, such as a Vanguard index fund’s record back to the 1970s, reused as the forward assumption for the projection.
The detailed projection’s default source, expected returns, does not replay one specific historical sequence. It uses each fund’s long-run average every year, a single figure summarizing the fund’s full history.
- Total return uses the geometric mean, which is the compound annual growth rate. Distribution yields use the arithmetic mean of the yearly rates. Price growth is the difference between them.
- Each fund’s average spans its own full history, so it is a fixed number per fund.
- A fund with a short real record has its missing early history reconstructed first, as described in the next section. It is then averaged over a full-length history rather than the stretch it happened to live through.
How this single averaged path relates to the many replayed-history trials, and how years before a fund’s real record are drawn there, is covered in Projections & Monte Carlo and market data in each run.
Short-history funds are reconstructed, not clipped
Section titled “Short-history funds are reconstructed, not clipped”Some catalog funds have a short real record, such as an international stock fund whose data starts in 1970, even though the catalog reaches back over a century. Rather than average such a fund over only its visible years, FinZot reconstructs its missing early history from a long-history proxy and takes the default over that full reconstructed history. A short-history fund’s default then reflects a full-cycle history instead of an unrepresentative recent stretch. FinZot shows the visible-history average and the reconstructed default side by side, so the adjustment is visible.
The pre-history years are modeled, not observed. The “data since” year a fund displays is still its real start.
Price growth and distributions
Section titled “Price growth and distributions”Within a year, a fund’s total return is its price growth plus its distribution yield. The distribution yield is itself the sum of the per-type slices described below.
- Price growth is the appreciation piece. It moves the fund’s price from the start of the year to the end, lifting the market value of every lot. That gain is unrealized. It is not income and not taxed until a lot is sold. At that point it becomes realized capital gain (allocation, lots, and selling).
- Distribution yield is the payout piece. FinZot applies it to the holding’s start-of-year market value and pays it out as cash that year, alongside the year’s other income (how a year works).
The history records each fund’s total return and its price growth. The distribution yield is the gap between them, split into tax-type slices.
Distribution tax types
Section titled “Distribution tax types”Each distribution is classified into one of four tax types. Two are taxed at the lower long-term capital gains rates, and two as ordinary income.
| Tax type | Real-world equivalent | Federal rate | Which funds pay it |
|---|---|---|---|
| Qualified dividends | Box 1b dividends | Long-term capital gains rates | Dividend funds, for the qualified fraction of the yield |
| Non-qualified dividends | Ordinary dividends, Box 1a | Ordinary income | Dividend funds, for the remaining fraction |
| Long-term capital gains | Fund capital gain distributions | Long-term capital gains rates | No default fund pays this. It appears only through a tax-mix override. |
| Interest | Bond and cash fund interest | Ordinary income | Bond and money market funds, for the whole yield |
Qualified dividends and long-term capital gain distributions are taxed together with realized long-term gains in the single lower bracket. Non-qualified dividends and interest fall into the ordinary income stack. A dividend fund’s yield is split by its qualified fraction, so the same yield produces both a qualified slice and a non-qualified slice. A bond or money market fund’s yield is entirely interest.
Distributions are taxed only in taxable accounts. In tax-advantaged accounts the distribution is reinvested and never appears as income. In a taxable account it is left as cash in the year’s flow and taxed by type.
Tax-exempt and state-exempt interest
Section titled “Tax-exempt and state-exempt interest”A fund’s interest carries two tax attributes beyond being ordinary income.
- Municipal interest. A tax-exempt bond fund’s interest is municipal bond interest, which federal AGI excludes entirely. That is the treatment such a fund is bought for. It is not exempt at the state level: the catalog does not record which state issued the bonds, so the fund’s interest is treated as out-of-state paper and taxed by the resident state unless that state exempts all municipal interest (income taxes).
- Federal security fraction. Part of a fund’s interest can come from U.S. federal securities such as Treasuries. That fraction is exempt at the state level, because states cannot tax interest on federal obligations. It remains federally taxable. The rest is taxable at both levels. A Treasury money market fund is entirely Treasury interest, so all of its interest is state-exempt.
Which funds carry a cost basis
Section titled “Which funds carry a cost basis”Each fund carries a flag for whether a cost basis is worth entering. The flag affects only the input side. FinZot tracks tax lots for every holding in a taxable account regardless, and consults the flag only to decide whether to ask you for a cost basis.
- Basis-tracked funds. In a taxable account each lot carries its own cost basis, and a sale realizes capital gain or loss lot by lot: the sale price minus the basis, times the units sold. How a sale picks lots and realizes gains is covered in allocation, lots, and selling.
- Cash equivalents. A cash-class money market fund delivers essentially its entire return as interest. Its price growth is at or near zero, so a lot’s value barely differs from what was paid, and a sale realizes little or no capital gain. The lots are still tracked. There is simply no basis worth entering, and the whole return is taxed year by year as ordinary interest. Near-zero price growth is not unique to the cash class. A Treasury bill fund behaves the same way while still carrying a cost basis.
Retirement accounts hold basis-free balances regardless of fund, so this distinction only matters inside taxable accounts.