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Every investment account grows once a year at a blend of the stock and bond rates, weighted by its bond allocation. The stock share also earns the dividend yield, which is reinvested. The opening balance grows for the whole year. Money added or withdrawn during the year earns growth only for the months it is invested.
Checking and savings accounts don’t grow and earn no interest.
Price growth=Balance×(bond share×bond return+stock share×stock price growth)
The rates come from the plan’s assumptions for that year, or from the account’s own settings where it has them.
Dividends=Balance×stock share×dividend yield
| Opening balance | $100,000 | |
|---|---|---|
| + | Bond growth40% bonds × 4% bond return | $1,600 |
| + | Stock price growth60% stocks × 7% price growth | $4,200 |
| + | Reinvested dividends60% stocks × 2% dividend yield | $1,200 |
| = | Balance on December 31 | $107,000 |
| → | Cost basis after reinvestmentStarting basis $100,000 plus the taxed dividends | $101,200 |
No other income, spending or contributions. The $1,200 of dividends is taxed as qualified dividends in the same year.
The account is rebalanced to its bond allocation every year: each year’s growth applies the current allocation to the whole balance. A bond allocation that changes with age takes effect the same way. See Market, inflation and wage assumptions.
By default every investment account holds the plan’s bond share. Switch Bond location to To all investment accounts together and the plan’s bond share becomes a target for all pooled accounts combined. Each year CoastMath takes that share of their opening balances, places those bond dollars in the accounts in your order (pre-tax first by default, then Roth and 529, then taxable brokerage and Other) and holds stocks in the rest. Accounts in the same group share the bonds in proportion to their balances.
| Bonds needed40% × $1,000,000 of opening balances | $400,000 | |
|---|---|---|
| → | IRA bond share$400,000 of bonds fit in the $600,000 IRA | 66.7% |
| → | Brokerage bond share | 0.0% |
| = | IRA on December 31$400,000 × 4% + $200,000 × 7% | $630,000 |
| = | Brokerage on December 31All stock at 7% | $428,000 |
Stock price growth 7%, bond return 4%, no dividends, contributions or spending. Total growth is $58,000 either way; with each account at 40% bonds the IRA ends at $634,800 and the brokerage account at $423,200.
An account with its own bond allocation or bond glide path keeps it, and its bonds count toward the target. Checking, savings and HSA accounts are never pooled; an HSA keeps the plan’s bond share. If the target exceeds the pooled balances, every flexible account holds only bonds.
An account’s Bond glide path sets its bond share by calendar year or by the owner’s age (the primary person for a joint account). Values change in a straight line between points and stay constant before the first and after the last. A glide path replaces the account’s fixed bond allocation.
Dividends are reinvested in the account that earned them unless a brokerage account pays them out (below). The tax treatment depends on the account:
- Taxable brokerage. The year’s dividends are taxed on that year’s return, as qualified dividends unless the account says otherwise (see How balances grow each year), and the reinvested amount adds to cost basis. A later sale therefore realizes less gain.
- Retirement accounts, HSA, 529 and Other. Dividends are reinvested with no tax in the year. They’re taxed only as part of the account’s withdrawals, if at all.
The dividend yield applies only to the stock share. By default, bonds earn their total return as price growth, with no separate interest income.
A taxable brokerage account can instead pay its income out: uncheck Reinvest dividends and interest in its fixed settings. The dividends and bond interest earned on the opening balance are then taxed exactly as before but go to the year’s cash flow, like other income, instead of buying more shares, and they don’t add to cost basis. In the first example, the $1,200 of dividends reaches cash and the account ends the year at $105,800 with its basis still $100,000. Income earned during the year on that year’s new contributions is paid to cash as well.
A taxable brokerage account can say how its income is taxed, under the account’s fixed settings in Advanced: how dividends and bond income are taxed. Every field is optional; blank keeps the default.
- Qualified dividends (%). The share of stock dividends taxed at the 0, 15 or 20 percent capital-gains rates. Default 100%. The rest, such as REIT and money-market fund distributions, is ordinary income: it fills the ordinary brackets, is taxed by the state and counts toward the net investment income tax. State rules for qualified dividends, such as North Dakota’s 40% exclusion, apply only to the qualified share.
- Bond income yield (%). Yearly interest as a share of the account’s bond holdings. Default 0. It comes out of the bond return rather than being added to it, so the balance is unchanged. The interest is taxed each year and reinvested, which raises cost basis, so a later sale realizes less gain.
- Bond income mix (%). What kind of interest that is, adding up to 100%. Blank means all Other.
- Treasury: federal ordinary income and net investment income, but exempt from state and local income tax.
- Municipal: no federal income tax and no net investment income tax. It still counts toward the income that decides how much Social Security is taxed, the marketplace premium credit and Medicare’s income-related premiums (IRMAA). States tax it unless you check In-state municipal bonds.
- Other (corporate and similar bonds): ordinary income for federal and state tax, and net investment income.
| Opening balance | $100,000 | |
|---|---|---|
| + | Bond price growth40% bonds × (4% bond return − 3.5% income) | $200 |
| + | Reinvested bond interest40% bonds × 3.5%, taxed this year | $1,400 |
| + | Stock price growth60% stocks × 7% price growth | $4,200 |
| + | Reinvested dividends60% stocks × 2% dividend yield | $1,200 |
| = | Balance on December 31 | $107,000 |
| → | Cost basis after reinvestmentStarting basis $100,000 plus the taxed dividends and interest | $102,600 |
The balance matches the first example; only the tax and the cost basis differ.
The settings have no effect in retirement accounts, HSAs, 529 plans or Other accounts, whose income is not taxed as it is earned.
An investment account can set an Annual fee (%) in its fixed settings: the fund expense ratio plus any advisory fee, from 0 to 5% a year. Blank means no fee. Each year the fee is the rate times the balance on January 1, taken out after that year’s growth. A partial first year charges the same share of the rate. Money added during the year pays no fee until the next January. Checking and savings accounts never pay one, and a fee never takes a balance below zero.
Fee=Opening balance×annual fee
| Opening balance | $100,000 | |
|---|---|---|
| + | Growth and reinvested dividendsAs in the first example | $7,000 |
| − | Annual fee1% × $100,000 | $1,000 |
| = | Balance on December 31 | $106,000 |
| → | Cost basis after reinvestmentUnchanged by the fee | $101,200 |
Taxes are the same as without the fee: it isn’t deductible.
Over decades the drag compounds. $100,000 in an all-stock Roth IRA at 7% a year grows to $761,226 after 30 years. With a 1% fee it reaches $574,349, about 25% less. The fees themselves total $79,058; the rest is growth those dollars would have earned.
Two more fee types can be added to the same account, alone or together with the rate:
- Annual fee ($): a flat yearly fee in today’s dollars that rises with your inflation assumption, charged when the account starts the year with a balance and prorated in a partial first year. On the example account, $250 leaves $106,750.
- Fee on gains (%): a share of the year’s growth, price change plus dividends and interest. A year with a loss pays none. On the example account, 10% of the $7,000 of growth is $700, leaving $106,300.
Cash flows during the year are spread over the months they cover, at the end of each month. A contribution earns growth from its month to December 31. A withdrawal gives up the growth its money would have earned after it left. Both use the account’s own blend and dividend yield, compounded monthly at the equivalent of the annual rate.
All-stock account at 7% a year. January’s deposit has 11 months to grow; December’s has none.
Show data
| Month deposited | Growth by December 31 |
|---|---|
| Jan | $63.98 |
| Feb | $58.00 |
| Mar | $52.05 |
| Apr | $46.14 |
| May | $40.26 |
| Jun | $34.41 |
| Jul | $28.59 |
| Aug | $22.81 |
| Sep | $17.06 |
| Oct | $11.34 |
| Nov | $5.65 |
| Dec | $0.00 |
| Contributions, $1,000 at the end of each month | $12,000 | |
|---|---|---|
| × | Average growth to December 31 | 3.17% |
| = | Growth on the year’s contributions | $380 |
About half a year’s growth. The opening balance still grows the full 7%.
| Opening balance, all stocks | $1,000,000 | |
|---|---|---|
| + | Full-year growth at 7% | $70,000 |
| − | Withdrawals spread over 12 months | $40,000 |
| − | Growth the withdrawn money didn’t earn$40,000 × 3.17% | $1,268 |
| = | Balance on December 31 | $1,028,732 |
Payroll contributions tied to a job that starts or ends mid-year grow only from the months that pay is received. A withdrawal that funds an expense with its own start or end month follows that expense’s months. Required distributions use the same month-end timing.
The first plan year runs from the plan’s start date to December 31. Balances grow for that share of the year: the annual rate is compounded over the fraction, and dividends are the annual yield times the fraction. From the next January every year is a full year. See Your plan’s start date and first year.
| Share of the year modeled92 of 365 days | 25.2% | |
|---|---|---|
| → | Growth rate for the partial year1.07 raised to the power 0.252, minus 1 | 1.72% |
| = | Balance on December 31 of the first year | $101,720 |
| × | Next year, full 7% | 1.07 |
| = | Balance on December 31 of the second year | $108,840 |
The overview’s year ledger and the net worth chart’s tooltip show an Investment growth line for each year. It is the change in investment balances from market movement, including growth on that year’s contributions and net of growth given up by withdrawals and account fees. When an account has a fee, the ledger also shows the year’s Investment fees. Taxable dividends appear as income and again as a reinvested contribution in the year’s cash flow. Bond interest in a brokerage account with a bond income yield appears the same way, as Taxable-Account Bond Interest and Reinvested bond interest.