[GNC] When income is not income

[Stan Brown (using GC 4.14)]

On 2025-07-01 20:20, R Losey wrote:
> Caveat #1: I am not an accountant

I'm not an accountant either. I did work for Ernst & Ernst (as it then
was) as a systems analyst and programmer, and like all employees I went
through their class on accounting concepts, where I learned just enough
to make me dangerous.

> Caveat #2: I know about annuities, but only in a general and high-level way
> 
> Regarding (A)...

> It seems to me that effectively, you hand over an amount ($P) to
> someone, and they agree to pay you so much a month $M until you die.

Exactly right. This is a SPIA (Single Payment Immediate Annuity), and I
have the subtype where there is no guarantee of payout for a certain
number of months only for every month during my lifetime.

> It seems like this *IS* an asset; it just has different behavior than
> other assets. It is almost like a having a friend that owes you money.

It's an asset, I think, but a weird one. Any other asset could be sold
if I needed to raise money; this one can't. Any other asset could be
disposed of by will or (in many cases) to a beneficiary; this one can't.
It makes me think of deferred income, which I think you alluded to
below. The right to receive those monthly checks for my lifetime is
certainly an asset, but it's hard to know what it's worth since I don't
know when I'll die.

> When you transferred your traditional IRA to the annuity, did you need
> to pay tax on it? Will you need to pay tax on the annuity payments ($M)?

I sold ETF shares in my Traditional IRA brokerage account, and the
proceeds were sent directly to New York Life to fund the annuity. This
is like a rollover: I never had custody of the cash, so the annuity is
still a Traditional IRA. There was no income tax at time of purchase,
but I will have to pay income tax on each year's worth of payments.

> How you were handling it is okay, but I think it tied in with (B)...
> perhaps the Annuity should be an Equity account?
> 
> 
> 
> Regarding (B)...
> 
> This subject was discussed in the group a few years back... what I remember:
> 
> Technically, all of the money you put into an IRA is "deferred income",
> which is an Equity account. As it earns dividends or interest, (or you
> add to it), the deferred income increases, and as you take funds out,
> the deferred income becomes actual income.

Your mention of "deferred income" jogged my memory -- I had forgotten
about that discussion. I've tried just now to find it in the mailing
list archives, using this Google search
"deferred income" site:lists.gnucash.org
and Google found this one:
> https://lists.gnucash.org/pipermail/gnucash-user/2023-January/105013.html
I'm going to study that carefully.

> So, for example, a $1000 IRA withdrawl would look like:
>     Increase (deposit) $1,000 to checking
>     Decrease $1,000 from the IRA
>     Decrease $1,000 from your deferred income
>     Increase $1,000 Income:IRA_Distrubution
> 
> 
> 
> On Tue, Jul 1, 2025 at 4:42 PM Stan Brown (using GC 4.14)
> <stan+gc at fastmail.fm <mailto:stan%2Bgc at fastmail.fm>> 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.
> 
>     -- 
>     Stan Brown
>     Tehachapi, CA, USA
>     https://BrownMath.com <https://BrownMath.com>