[GNC] When income is not income

[David Warren]

Agreed w/ Michael 100% on the annuity.  Of COURSE it is an asset.  (And
plenty of assets out there have conditions of all kinds; not just
annuities.  They are still assets.)

There are plenty of ways to handle deferred income accounts like IRAs.  But
I will suggest one that should fit your desires:
If you make a non-deductible IRA contribution (e.g. you transfer $100 from
a checking account to the IRA):
   Debit Asset:IRA $100
                     Credit Asset:Checking account $100

If you ask your company to forego $1000 of salary and deposit that to your
IRA as a deductible contribution, (and pretend your salary was $3000 that
period pre-contribution)

Debit Asset:Checking account $2000 [I am ignoring taxes or other salary
deductions]
Debit Asset:IRA $1000
                      Credit Income:Taxable $2000
                      Credit Income:Deferred $1000
[Note that some, perhaps Michael Novack, would make that an Equity vs. an
Income account.  I think you could pick either and have the same impact.
Just a matter if you do or don't want to see that running income somewhere
on your income statement.]

Now assume your IRA goes up in value over some period.  The $1100 you
contributed is now worth $1900.  I book:
Debit Asset:IRA  $800
             Credit Income:Deferred $800

Hopefully you see where we are heading!!

Now when it's time to make withdrawals (required or otherwise), here's how
we record a $300 withdrawal from the IRA:

Debit Asset:Checking account  $300
                 Credit Asset:IRA       $300
Debit Income:Deferred               $300
                 Credit Income:Taxable $300

voila!  Everything balances.  We'd have $1600 remaining in the IRA with a
$100 tax basis (given that was the original non-deductible contribution)
and the Income:Deferred account balance would be exactly $1500, or
represent the amount we still haven't paid taxes on as it has not yet
become official IRS taxable income.

And if you don't want that deferred income EVER showing up on any income
statement, you make it an Equity:Deferred IRA Income account!  But
everything else works the same...

On Wed, Jul 2, 2025 at 9:52 AM Michael or Penny Novack via gnucash-user <
gnucash-user at gnucash.org> wrote:

> Very separate questions.
>
> What you paid for the annuity is its basis as an asset. It is, however,
> a "conditional asset". The condition in this case your being alive.
> After your death, whoever is closing down your books, would be entering
> a "journal transaction" to reflect its "evaporation" << debit equity,
> credit annuity >>
>
> When you receive income from this annuity, simply debit cash, credit
> income << the value/basis of the annuity is not decreased >>
>
> Distributions from an IRA, 401k, etc. are very different. And whether
> that's taxable income depends on type of IRA, where you are in the
> history of distributions, etc. I think what has you confused is that the
> distribution is BOTH cash received, income, and reduction of the asset.
> In order to discuss handling THAT part of it we need to ask how are you
> carrying the IRA (as an asset) and how did it get there. BUT --- to
> start you off thinking in the right direction, the transaction might
> have FOUR accounts, debits to cash and equity, credits to income and
> IRA. << So it WAS an accounting question too >>
>
> Michael D Novack
>
>
> On 7/1/2025 5:41 PM, Stan Brown (using GC 4.14) wrote:
> > Disclosure:: (A) is an accounting question, not a GC question. I hope
> > some folks will find the question interesting enough to comment on
> > anyway. (B) is, I think, a GC question.
> >
> > (A) Annuity
> >
> > Last year I bought an annuity for a single payment of $P. I will receive
> > a fixed $M each month until I die. Regardless of when that happens,
> > there is no payout to any beneficiaries.
> >
> > I set this up as Assets:Investments:Annuity with an initial value of $P,
> > transferred directly from my traditional IRA.
> >      debit $P:  Assets:Investments:Annuity
> >      credit $P: Assets:Investments:Traditional_IRA
> > When I received the first payment last month, I did this:
> >      debit $M:  Assets:Checking Account
> >      credit $M: Assets:Investments:Annuity
> > But now I'm having second thoughts.
> >
> > This annuity isn't an investment like a mutual fund. While it has a
> > value, I can't touch that value ahead of the monthly schedule, and my
> > heirs (or creditors) get nothing. So I'm not sure that it makes any
> > sense to have it as an asset. Maybe I should have done this for the
> purchase
> >      debit $P:  Expense:Annuity_purchase
> >      credit $P: Assets:Investments:Traditional_IRA
> > and this for each payment
> >      debit $M:  Assets:Checking Account
> >      credit $M: Income:Annuity_Payout
> > That would reduce my total assets and my net worth by $P, but I'm
> > getting uneasy about having included the annuity in Assets in the first
> > place.
> >
> > Comments?
> >
> > At least this has the virtue of including the annuity income in my
> > Income Statement. But that leads to another issue ...
> >
> > (B) IRA
> >
> > Right now withdrawals from my IRA are simple transfers:
> >      debit $X:  Assets:Checking Account
> >      credit $X: Assets:Traditional_IRA (same amount)
> > While I think that's the right thing from an accounting standpoint, it
> > has a drawback: the Income Statement doesn't show those withdrawals as
> > part of my income, even though the tax man treats them as income and
> > they should be in any statement I provide when applying for credit.
> >
> > Is there a way to eat my cake and have it? Maybe I could create an
> > account Income:IRA_Withdrawals and a contra account
> > Expense:IRA_Withdrawals_Contra. When making a withdrawal of $X I would
> > record the transaction in the previous paragraph and also this:
> >      credit $X: Income:IRA_Withdrawals
> >      debit $X:  Expense:IRA_Withdrawals_Contra
> > I could exclude the contra account from the income statement to produce
> > an Income Statement containing all my income that's subject to tax. But
> > this seems kind of rigmarolish, and I'm wondering whether there's a
> > better way.
> >
>
> --
> There is no possibility of social justice on a dead planet except the
> equality of the grave.
>
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