[GNC] When income is not income

[David Warren]

On Thu, Jul 3, 2025 at 8:30 AM David Warren <david at warren1.net> wrote:

> 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.)
>
>
And, I should add, if you have owned a retirement account for a very long
time, it would be common to have the biggest historical growth in the asset
account NOT come from salary or other transfers TO the account, but,
rather, from investment gains.  So the next question you'll have to ask is
how have you been accounting for those investment gains in your set of
books?  If you made manual entries to increase the value of your retirement
accounts, when you debited the retirement account to grow it, what did you
credit?  And if you, instead, used your accounting system's "Stock"
[investment] shares and prices, you are going to have to re-think when/how
to make manual debit and credit entries to achieve the tax based accounting
for income and deferred income that you now desire.

(In my personal system, I elected, when I moved to gnucash, to NOT track
investment gains via the gnucash "Stock" / prices system.  Rather, at each
quarter's end, I simply make a manual entry to my retirement accounts where
I (usually, as I usually have investment gains, but there are, of course,
exceptions, when the investment accounts fall in value, so the following
entries are reversed):

Debit Asset:Retirement-Account $100
..........Credit Income:Deferred-Retirement $100
Debit Income:Eventual-Taxes-on-Deferred-Accounts $35
..........Credit Liability:Deferred-Taxes-on-Retirement Accounts $35

I have spoken to many accountants about what they do and they agree that it
is rare to make all 4 entries.  They would also typically use Equity rather
than Income accounts for the two middle entries.  And I, too, need to be
careful, as the middle two entries aren't taxable events.  I nevertheless
like to see my change of net worth through my virtual income statement.

And the Liability is accurate, given I will eventually have to pay taxes
(I'm using 35% for federal+state) on all growth in this account.  Then when
I actually PAY the taxes, my net worth does NOT decline.  I simply debit
the liability account and credit the account I use to pay the taxes.  FYI