[GNC] When income is not income

[David Warren]

On Wed, Jul 2, 2025 at 5:47 PM Stan Brown (using GC 4.14) <
stan+gc at fastmail.fm> wrote:

> Okay, I can kinda-sorta see the point of Deferred Income, but I have two
> issues, one theoretical and one practical.
>
> Theory: In your latest example, That $1000 put unit the IRA is money I
> own -- not in the future only, but right now. If I want to, I can cash
> it out and take a vacation. It would be foolish financially, because of
> associated taxes and penalties, but it would be possible and legal. If
> you can dispose of something at will, isn't it an asset of yours?


Yes, of course it is an asset of yours.
In what part of my proposed entries do you think I don't count making a
salary deduction and resulting deposit to an IRA as growing your asset?
The specific entry i suggested making for that $1000 deposit to your IRA
was:

*Debit Asset:IRA $1000*
          Credit Income:Deferred $1000

The $1000 debit to an asset account (your IRA) increases the balance of
that asset by $1000.  So I really don't understand your question.

>

Practice: A decade ago, I reasoned as above, so every contribution to an
> IRA was a debit to Assets:IRA and a credit to Assets:Checking Account,
> Income:Salary, or Income:Employer 401k Match. Since retiring, every
> withdrawal was debit Assets:Checking Account, credit Assets:IRA.
>     I quail at the thought of rejiggering a busy ten years of
> transactions, and giving each of them two extra splits. Is this a
> situation where there's really only one right way, or is there some
> wiggle room?
>

No one is suggesting there is a "right way", much less a "sole" right way?
It's your set of books and of course there is always 'wiggle room' (meaning
choices).  Many times I have decided to start accounting for something in a
different way than I used to, and I always have the choice of making
entries (say, on 2024-12-31 or 2025-01-01) to start doing it the new way as
of this year, vs. going back and restating dozens or hundreds of historical
entries.  And, yes, I have often made the choice to start the new
accounting this year, or from last year, so I can make a few adjustments,
but not dozens.  It really depends on what your goals are.

I think what you are now experiencing is probably quite common.  People
work for decades and contribute money to tax-deferred accounts.  They debit
the tax-deferred asset accounts for the contributions and either *de facto *or
explicitly debit those accounts further from investment gains over
decades.  Then they get to a period of life where the government requires
them to withdraw money from those accounts and pay taxes on them, and they
realize, as you did, that you want to credit BOTH your asset account that
receives the transfer of funds from the tax-deferred account AND you want
(to show your accountant, or just to do your own taxes and see your taxable
income) to credit a taxable income account, and you, like many people, see
this as a conundrum.

There is no need to go back and make [30] years of adjustments.  BUT you
could create an Equity:Deferred Taxable Income on IRA account and credit it
with the total amount of taxable income you will eventually have on that
IRA.  (So if you NEVER made non-tax-deductible contributions to that IRA,
and ONLY made pre-tax contributions from salary, then your tax basis in the
IRA is zero, and the full amount of your IRA needs to equal that
Equity:Deferred Taxable Income account).  So if your tax basis is 0 and the
IRA balance is $250,000, then I am proposing you credit a new
Equity:Deferred Taxable Income account for $250,000.

So what is the offsetting debit entry?
That will depend on what entries you have used as offsetting credits as the
value of your IRA (or 401k) has grown.  What you will want to do is
determine what past aggregate credits you made as the IRA grew.  Of course,
if you made transfers from your checking account, and if those increased
your tax basis in the IRA, then that did NOT create deferred taxable
income, so you don't need to offset those.  But whatever accounts (you
mentioned Income:salary, which was sort-of correct but means back then your
income statement didn't distinguish between taxable salary and non-taxable
salary!  and you mentioned employer-match) So debit those accounts to
offset the new credit entry.  And all should work.

(there is some further complexity if you indeed have tax basis, as my
understanding [i'm not an accountant!] is that withdrawals from IRAs with
tax basis are part taxable, part non-taxable based on the *pro rata *ratio
of your tax basis to your aggregate IRA account balance pre withdrawal.)




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