How do gross IRA distributions get into tax calculations and reflected in budget?

Ralph51

When selling IRA funds and having taxes withheld there are two issues I cannot figure out. 1. The funds transferred to taxable checking are done using a withdraw/transfer transaction in the IRA account. I would like to reflect the money in checking as "IRA Distribution" so that it will be included in the Budget. This withdraw/transfer only reflects the net after tax amounts, not the gross taxable amounts. I want to reflect the gross amount in "IRA Distribution" income and the related taxes in "Tax" expense. 2. The Tax schedule only reflects the net of taxes amount on the "Total IRA gross distrib". How do I get it to reflect the pre tax gross amount?

Sherlock

To include the transfer from the IRA account as income in the budget, I suggest you open the budget, select Manage Budget Categories, Transfers In, check FROM IRA account, and select OK.

If this is your tradition IRA account, the tax line item assignment for the transfer in the checking account should be 1099-R:Total IRA taxable distrib.   This is normally achieved by selecting the tax line item in the Transfers out pull-down menu on the IRA accounts Tax Schedule Information window: open the IRA account, press Ctrl + Shift + E, and select Tax Schedule



Note:  The withholding of tax should be performed in the checking account.  I suggest using a split transaction for the net amount with an entry for the transfer and entries for tax withholdings.

Sherlock

Ralph51 said:

Thanks. That fixed the reflection of the IRA distribution in the budget. The distribution carries through to the Tax Schedule report as a 1099R item. However, a IRA distribution does not show up as income in either the Tax Center or the Tax Planner. Additionally, it would be an improvement on the Tax Summary report, if the IRA "Transfer" was summarized in the Income section, rather than kind of dangling in a transfer caption.

If you've made the appropriate tax line item assignment for the transfer, the distribution should appear under Taxable Income YTD on the Tax Center view and within the Taxable IRA/Pension Distributions within Other Income in the Tax Planner.

Sherlock

To include the transfer from the IRA account as income in the budget, I suggest you open the budget, select Manage Budget Categories, Transfers In, check FROM IRA account, and select OK.

If this is your tradition IRA account, the tax line item assignment for the transfer in the checking account should be 1099-R:Total IRA taxable distrib.   This is normally achieved by selecting the tax line item in the Transfers out pull-down menu on the IRA accounts Tax Schedule Information window: open the IRA account, press Ctrl + Shift + E, and select Tax Schedule



Note:  The withholding of tax should be performed in the checking account.  I suggest using a split transaction for the net amount with an entry for the transfer and entries for tax withholdings.

Ralph51

Thanks. That fixed the reflection of the IRA distribution in the budget. The distribution carries through to the Tax Schedule report as a 1099R item. However, a IRA distribution does not show up as income in either the Tax Center or the Tax Planner. Additionally, it would be an improvement on the Tax Summary report, if the IRA "Transfer" was summarized in the Income section, rather than kind of dangling in a transfer caption.

Sherlock

Ralph51 said:

Thanks. That fixed the reflection of the IRA distribution in the budget. The distribution carries through to the Tax Schedule report as a 1099R item. However, a IRA distribution does not show up as income in either the Tax Center or the Tax Planner. Additionally, it would be an improvement on the Tax Summary report, if the IRA "Transfer" was summarized in the Income section, rather than kind of dangling in a transfer caption.

If you've made the appropriate tax line item assignment for the transfer, the distribution should appear under Taxable Income YTD on the Tax Center view and within the Taxable IRA/Pension Distributions within Other Income in the Tax Planner.

Ralph51

Thanks. The reason that the IRA distribution did not show up in the tax center, was that I used "1099R Gross Distributions" rather than "1099R Taxable Distributions". Another question: The Tax Center only shows YTD actual amounts. Is there any way that budgeted amounts can also be systematically included in the Tax Center?

Boatnmaniac

(Edited to correct an inaccuracy which is identified in italics.)

I don't believe there is a way for Tax Planner to capture this data from a Budget.  But if you set up a recurring Transfer Reminder or Income Reminder (using the transfer between accounts for the category) then Tax Planner will capture the future planned IRA distributions...and it will also be captured in the Budget. 

I do understand the desire to show IRA distributions under Income but from an accounting perspective they are not Income transactions.  They are simply transfers of financial assets from one account to another.   As such IRA distributions will show up in the Budget and in the Tax Summary report as transfers because that is what they are.  However, Tax Planner and the Tax Schedule report will report them accurately as Income because as far as the IRS and the Tax Code are concerned they are deferred income transactions.

Ralph51

Thanks. When you are a retiree like me, IRAs are an important source of income. True, it is a transfer, but to me it is not just shifting funds, it serves sort of like a pension. It isn't a big deal to have to put forecast/budget tax information in manually, but it would have been nice for it to get in there systematically. There is no more powerful personal finance tool than Quicken, but it cannot do everything.

Sherlock

Ralph51 said:

Thanks. The reason that the IRA distribution did not show up in the tax center, was that I used "1099R Gross Distributions" rather than "1099R Taxable Distributions". Another question: The Tax Center only shows YTD actual amounts. Is there any way that budgeted amounts can also be systematically included in the Tax Center?

If you create income reminders for the projected distributions (aka the budgeted amounts) with the appropriate tax line association, the projected income will be systematically included in Other Income in the Projected Tax on the Tax Center via the Tax Planner.  Otherwise, you may set an adjustment or an annual amount for the expected distributions in the Tax Planner.

Boatnmaniac

Ralph51 said:

Thanks. When you are a retiree like me, IRAs are an important source of income. True, it is a transfer, but to me it is not just shifting funds, it serves sort of like a pension. It isn't a big deal to have to put forecast/budget tax information in manually, but it would have been nice for it to get in there systematically. There is no more powerful personal finance tool than Quicken, but it cannot do everything.

I've been a retiree for nearly 6 yrs now and I, like you and others, initially had that same "IRA distributions are income" mindset.  Then someone once said to me: "Picture all your IRA funds being instead in a passbook savings account.  When you transfer money out of your savings account to your checking account so you could cover your expenses, would you still consider that to be income or would it simply be a transfer of funds between accounts?"    That settled the issue for me right then and there because the only difference between transferring a distribution from a savings account vs from an IRA account is the tax liability.

As noted in my last post and as mentioned by @Sherlock above, setting up recurring Income Reminder or Transfer Reminders will systematically populate your budget and tax forecasts.  And if you do this and then set up your Reminders to be shown in your checking account register you can also easily see weeks or months in advance what adjustments you might want to make to your recurring Reminder distributions to make sure you maintain the correct balance in the checking account.  You can also see what your projected account balances are for each month in advance below the Reminders on the Manage Manual Bills & Income view.  And, when you make adjustments to the Reminders when needed/desired you can immediately see what the impact will be to your Tax liability via the Tax Planner.  I've found the whole process to be very systematic and very helpful to me.

(Edited to make a correction.  The correction is shown above in italics.)

Boatnmaniac

@Ralph51 - If you do set up the recurring Reminder, I suggest consider setting it up as an Income Reminder. 

• The Reminder income amount would be your net IRA distribution amount. 
  
• Then split the category for the Reminder and in the 1st line of the split category, enter the gross distribution amount as a transfer from your IRA account. 
  
• The 2nd line of the split category would be the expensed amount (a negative number) for the tax withheld. 
  
• The total of the split category would be the net amount of the distribution.

The main heartburn that this causes for some people who download their IRA transactions is that they will need to manually edit the distribution transactions so the funds get redirected back into the IRA account as cash or to delete the distribution transactions when they download.  This is necessary because you will want to make sure you keep the checking account Income Reminder split categories intact so they correctly play into your Budget, the Tax Planner and Tax reports.

markus1957

Adding- Transfer reminders do not honor the tax lines set up in account details so they are not a good option for IRA distributions. In my mind this is a bug that has persisted for years in spite of the behavior being pointed out periodically for years.

Chris_QPW

Ralph51 said:

Thanks. When you are a retiree like me, IRAs are an important source of income. True, it is a transfer, but to me it is not just shifting funds, it serves sort of like a pension. It isn't a big deal to have to put forecast/budget tax information in manually, but it would have been nice for it to get in there systematically. There is no more powerful personal finance tool than Quicken, but it cannot do everything.

@Boatnmaniac had a very good explanation of why this isn't "income", but I can't resist adding my own two cents.

What the IRS considers "income" is completely different than what individuals usually consider it.  The IRS wants to get paid its taxes before you die, and as such the rules are setup like that.  But is it really "income" to you?

Well that depends.    My dad retired from the US Air Force after 30 years and between that and Social Security, he didn't need the RMD.  But once he died, and the Social Security was cut, and the Air Force retirement money stopped.  It was certainly "income" to my mom.

Retirement like like running a business you have to think about "income" differently than what the IRS calls it.  Your "income" can come for a lot of different sources, and the RMD transfer is just one possible place it might come from.

markus1957

A distribution from a traditional IRA is deferred income, unlike money from a savings account. What you call it when you take it out may be semantics, but Uncle Sam calls it Income.

Chris_QPW

markus1957 said:

A distribution from a traditional IRA is deferred income, unlike money from a savings account. What you call it when you take it out may be semantics, but Uncle Sam calls it Income.

Like I said what the IRS calls something and what the average person calls it is different.

And in this context this matters.  If I'm planning taxes then I certainly need to know how the IRS is going to treat that withdraw and get it set right for the tax planner/reports.  That is exactly what setting the proper tax line in that account all about.

On the other hand the moment I start talking about a budget where I want my "income" and expenses to balance that is a completely different thing.  And that is where you have to realize that it isn't what the IRS calls income that really matters.

Boatnmaniac

Chris_QPW said:

markus1957 said:

A distribution from a traditional IRA is deferred income, unlike money from a savings account. What you call it when you take it out may be semantics, but Uncle Sam calls it Income.

Like I said what the IRS calls something and what the average person calls it is different.

And in this context this matters.  If I'm planning taxes then I certainly need to know how the IRS is going to treat that withdraw and get it set right for the tax planner/reports.  That is exactly what setting the proper tax line in that account all about.

On the other hand the moment I start talking about a budget where I want my "income" and expenses to balance that is a completely different thing.  And that is where you have to realize that it isn't what the IRS calls income that really matters.

The way it was explained to me by a tax accountant (paraphrased):  "Placing money into a retirement account doesn't change when the money was actually earned (i.e., was income).  It just changes when the IRS recognizes it as income and taxes it.  When money is finally pulled out of the retirement account does not make it new money (i.e., new income).  It's just that the IRS is finally getting around to taxing what was earned years ago." 

markus1957

Semantics describing negative or positive cash flow associated with exchanging assets/services with fluctuating value that are consumed or retained.

Chris_QPW

Boatnmaniac said:

 money into a retirement account doesn't change when the money was actually earned (i.e., was income).  It just changes when the IRS recognizes it as income and taxes it.  When money is finally pulled out of the retirement account does not make it new money (i.e., new income).  It's just that the IRS is finally getting around to taxing what was earned years ago." 

I definitely agree with that statement.  And I hope that was clear in my statements.

There are two completely different subjects in this thread.

One is how to track the tax ramifications.  The other is how should one setup their budget depending on what they consider income or not in that budget.

Boatnmaniac

markus1957 said:

Adding- Transfer reminders do not honor the tax lines set up in account details so they are not a good option for IRA distributions. In my mind this is a bug that has persisted for years in spite of the behavior being pointed out periodically for years.

Thanks for weighing in on this.  I went back and tested out your statement regarding Transfer Reminders.  What I found is that these Reminders will be captured properly in Tax Planner, Tax Schedule and Tax Summary...but only those Reminders that have been entered into the account registers.  Future Reminders not yet entered into the registers will not be captured so that is a big problem for tax planning.

I also noticed that if the Transfer Reminder is edited during the Reminder entry process to add the split categories so that the withheld tax can be entered, that tax is not captured in Tax Planner, Tax Schedule or Tax Summary.

So, I stand corrected and have edited my earlier posts above to remove the reference to Transfer Reminders.  I also agree with you that this is a bug that should be corrected.

Ralph51

Thank you all for the robust responses to my issues. I think I've got a handle on this.

How you treat IRA withdrawals depends on your view those as income or as a transfer. I focus more on the tax impacts, so I'm interested in seeing this as income, so I treat this distribution as income. Those distributions are well thought out well ahead of time, are transferred in 2 or 3 transfers per year and are used to provide the spending shortfalls that my monthly income streams do not cover.