How to deal with RRSP's (Canada)

[David Carlson]

Greetings All,

Like many of you, I am not an accountant and I do not have a compelling
reason to be precisely accurate to GAAP other than yielding to my OCD.  I
am a US citizen so I am subject to US IRS tax code as well as state and
local taxes.

When I was actively employed and contributing to various "Qualified Plans"
such as ESOPS, IRA's 401-Ks, etc., I wanted to include the vested portions
in my personal net worth estimates. When I started tracking these things in
GnuCash I created a subset of investments that I called "Investments -
Qualified Plans" so that I could separate them from regular taxable
investments.  Accounts under that top level needed separate "Qualified"
income and expense accounts as well. By that time I did not have to set up
a way to track vesting, but I think that it is doable.

Now that I am retired and taking distributions from some of these plans, I
am providing for the now current tax liability by adding accounts to the
distribution transactions to simulate the "Qualified Expense" of the
distribution to the qualified plan and the "Taxable Income" to my regular
taxable wealth.  I place these extra lines in the transactions that
represent the actual distribution from the qualified plan to a regular bank
or investment asset account which normally also includes income tax
withholding and possibly other deductions if there are any.

I find that this method seems to meet my needs quite well.

David C

On Fri, Jan 5, 2018 at 6:08 PM, DaveC49 <davidcousens at bigpond.com> wrote:

> Hi David
>
> The main reason for my suggested approach is that the relevant income is
> still earned at the time the contributions are initially made and at the
> time the fund earnings are credited to the account. It is only that the tax
> on these earnings is deferred until the RRSP is converted to an RRIF and
> funds are withdrawn from the RRIF and it is taxed at a current marginal
> rate
> not the original rate.
>
> We have similar but not exactly the same tax  deferred retirement savings
> schemes in Australia, hence my interest. I am fortunately past the
> accumulation phase and in the retirement phase. I track the fund separately
> from my daily accounts and simply treat the payments from the fund as
> income
> in my personal accounts and an expense in my accounting of the fund which
> is
> in reality done by my bank which administers it for me.  We have schemes in
> Australia which have different tax statuses depending on whether tax was
> fully deferred on input so I have income streams which are taxed on
> withdrawal and others which are not, to complicate the accounting. This
> approach has always been vaguely dissatisfying for me though as the fund is
> an asset and will form part of my estate when i drop off the perch and I
> feel it should be able to be incorporated in my personal accounts if only
> to
> simplify things for my executor (the likely executor is fortunately an
> accountant).
>
> Mike Novak makes a lot of valid points about the vesting of and accounting
> for employer contributions which may apply to retirement fund accounting
> generally, but not specifically to the RRSP-RRIF system in Canada which is
> largely designed for self employed people to set up retirement funding and
> to similar self managed and commercial funds in Australia. The accounting
> also has to reflect the legislative framework which supports and
> establishes
> a particular type of fund and its terms and conditions.  That said as long
> as you have captured the essentail data at any point in time, you can
> always
> adjust the approach in the future if necessary.
>
> Nevertheless it should be possible to extract some broad general principle
> accounting methodology from which to develop specific adaptions to
> individual circumstances. That was my purpose in trying to identify the 5
> essential assumptions/features behind the RRSP-RRIF system in Canada in
> looking at this.
>
> I had considered setting up of a long term Liability account for the
> deferred tax. The only problem with this is while in the contribution phase
> any tax liability calculations will be estimates only as you will likely
> not
> know precisely the marginal tax rate which may apply when you are in the
> retirement phase. This would then introduce  the complication of having to
> make adjustments to these estimates once in the retirement phase and
> withdrawing funds and paying tax on the withdrawals.
>
> My financial advisor and I did some estimates of the future tax liabilities
> under various scenarios for example when setting up my finances for
> retirement mainly for comparison of the advantages of using different fund
> structures but these were only ever estimates. However incorporating this
> into your accounts may serve some purpose if you specifically want to
> monitor the ultimate actual performance of your retirement strategy vs your
> expectation of that performance.
>
> I personally did not see any particular advantage in this level (deferred
> tax liability) of recording of my finances as individual calculations for
> possible strategies at the planning phase are much more useful to me and
> once I have committed to a strategy I will follow it unless circumstances
> change sufficiently that there is a benefit in adopting an alternative
> strategy and the possibility of changing strategy exists in any case. I
> prefer a looser form of monitoring with occasional spot checks. I also have
> performance reports from my financial institution which partly serve this
> function.
>
> I understand Cam's objective of trying to get the fund withdrawals to
> appear
> in a standard income report and if his approach works for him and provides
> the necessary information he needs, then that is fine provided he is aware
> of the possibility of he may introduce a distortion elsewhere in his
> accounts, which he may purposefully ignore. The only concern is someone
> else
> adopting a procedure without being aware of the possible distortion it may
> produce. An accountant may have a fit but as long as the taxman and the
> user
> are happy - no problem. This is however more likely to be true, if the
> accountant is also happy.
>
> I am going to continue to see if I can find an approach which is more
> intellectually satisfying  and rigorous in accounting terms. The problem is
> really how to account for the conversion of an asset to an income stream in
> the same set of books. Concepts associated with the recording and sale of
> long term assets are one possibility to have a close look at.
>
> Cheers
>
> David Cousens
>
>
>
>
>
> -----
> David Cousens
> --
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