Sale of IRA Mutual Funds as an Premature Distribution

[John Ralls]

> On Oct 26, 2015, at 10:05 PM, Milton Stern <drmoshe5 at gmail.com> wrote:
> 
> Thank you David.
> 
> I am aware that this is not a place for free accounting advice.
> 
> I was just trying to get advice of categorization and transfer functions of
> GnuCash.
> 
> 1. My IRA account is in Assets, should it be in Equity?
> 2. What should the transaction look like?
> 
> Trying to understand a prior thread, and use it practically:
> http://gnucash.1415818.n4.nabble.com/Accounting-Treatment-of-Taxable-IRA-Distributions-td4661627.html
> Also noting that this discussion is not of a Premature Distribution.
> 
> Trying to follow the standard mutual fund selling pattern within GnuCash
> documentation seems inappropriate due to the premature distribution of an
> IRA is practically speaking pure realized deferred income.
> 
> Thanks for the input,

No, your account shouldn’t be in Equity. An IRA is definitely an asset and it’s not a separate entity from you. If it was it would need its own tax id, like a trust does, and you’d have to maintain its books in a separate GnuCash file and file a separate return for it. 

A withdrawal from an IRA isn’t an asset sale, it’s a transfer from the IRA’s cash account. Nor is it income, contrary to Mike Novak’s claim in that thread. The income events occurred when the securities in the IRA paid dividends or when you sold them for a gain. That income wasn’t taxable at the time, but you must recognize it as taxable when you make a withdrawal, according to some proration formula that I’ll leave as an exercise for you to look up. GnuCash can’t do the proration part for you, you’ll need to maintain a spreadsheet separately for that calculation.

It might be wise to follow David’s suggestion to get an accountant to help with setting this up to make sure you do it right,
but my non-accountant instinct is to have a non-taxable “Deferred Income” account that collects the gains, dividends, and so on inside the IRA, and when you make a withdrawal you would transfer from that Deferred Income account to an ordinary income account that you would use for calculating your tax liability. Any penalties for early withdrawal or insufficient withdrawal would be a separate expense.

Regards,
John Ralls