[GNC] Roth IRA conversion

[Stan Brown]

On 2022-12-18 19:20, Fred Tydeman wrote:
> For a USA person, when I move cash from a regular IRA (tax deferred
> account) to a Roth IRA (tax free account), besides the movement of the
> cash, I need to also somehow show that the cash moved is considered
> income.  What should be the other side of the income pair?

Fred, I agree with Michael that this is an accounting question, not a
GnuCash question. I'm not a tax professional, but being retired I've had
occasion to research the rules about IRAs so that I can estimate my
taxes. Therefore ...

It's income as far as the IRS is concerned, but it's not income in any
accounting sense. You don't own any more money or assets after the
rollover than you did before. In your place, I would record this and
only this:
DR: Assets:Roth IRA $x
CR: Assets:Traditional IRA $x (same amount)

Do you just ignore the tax liability on the rollover, for GnuCash
purposes? Maybe. It depends on whether you're accruing your taxes or
recording them only when paid or refunded.

I accrue, but I suspect that I'm in the minority as far as personal
finance is concerned. A spreadsheet estimates my tax, and at the end of
every month I make these entries:
DR: Expenses:Income Taxes
CR: Liabilities:Federal Income Tax
DR: Expenses:Income Taxes
CR: Liabilities:California Income Tax
The withdrawal from the traditional IRA would show up on my tax
spreadsheet, so this month I'd be accruing larger-than-usual amounts of
tax, but the _structure_ of the entries would be what it always is.

What if you don't accrue your income taxes, just account for them when
they are paid? Right now, you would record only the withdrawal from the
traditional IRA and investment in the Roth IRA. When you actually pay
your income tax, you would account for it in the same way you always
have. The number will just be higher this year because of the rollover
being taxable, but again the _structure_ of the entries will be what it
is every year.

P.S. Be careful about estimated taxes. Depending on the size of your
rollover and the context of the rest of your tax return, the tax you
have incurred from the rollover might be big enough that you need to
make an estimated payment by January 15th. See Form 2210 to determine
whether that's necessary and how much you must pay early. Especially if
you made the rollover late in the year, you may want to use the
annualization method on Form 2210 to eliminate or reduce the penalty.

Stan Brown
Tehachapi, CA, USA
https://BrownMath.com