Which category do you use when making Roth IRA contributions from the checking account?

carsonbeach

I just wanted to check with the community what category you use when making contributions to a Roth IRA. Currently, in the transfer column on the checking account I am selecting the Roth account. In the category is defaults as Transfer: [Roth IRA Account]. Is this the best practice use? Also, is this best for reporting. I would appreciate any advise. Thank you!

jacobs

Yes, you're doing it correctly. Moving money from your checking account to a Roth IRA account is a simple transfer of funds from one asset to another -- which is exactly the transaction you've described entering in Quicken. There's no category; categories are for income or expenses, and this transaction is neither income nor expense. And the money moved isn't taxable, so this transfer won't show up on the Tax Schedule report. (You may need to report how much money you put in your Roth IRA at tax time, but that's an easy enough report to generate from Quicken.)

carsonbeach

Thank you so much, also I have a questions on my 401k contributions which contributions are from both myself and my employer. What do you recommend for using for a category? Currently, for my paychecks (income) I am recording just the net amount in the checking account.

jacobs

If you record your net pay in Quicken, then you have to "manufacture" the 401k contribution. The typical way to record a paycheck is to record the net amount with split lines for your gross pay and your various deductions. Here's a sample:



That may seem like a bit of work, but keep in mind you create the transaction just once and then make it a scheduled transaction for whatever frequency you get paid. If your pay is the same each pay period, that's all there is to it; if you get paid different amounts, you'll have to tab through and edit the amounts, but the structure of the splits will be in place.

In this example, the next-to-last split line shows a deduction from your pay being transferred to the 401k account.

If you don't want to tack your gross pay and deductions like this and don't plan to use Quicken for gathering tax information, you can continue to record your paycheck as a simple net pay transaction. Then you'd create a separate transaction in your 401k account for the deposit of funds deducted from your pay. I'd use the special category of "Adjustment" for such a transaction, because allows you to make money appear "out of thin air" -- e.g. it doesn't show up as income or expense; it just increases your account balance.

-----

So far, this has only talked about the portion of your 401k contributions coming out of your pay. What about the matching contributions made by your employer? You can record this either as an additional split in your paycheck or as a separate schedule transaction. To do it in your paycheck, it's a little tricky because you want to include it as a split line, but it doesn't add to or subtract from your pay. The way I would do this is to create a sub-category of Personal Income for "Employer 401k Contrib." Then you would add two split lines to your paycheck:
   (1) Category=Employer 401k Contrib., Amount = what your employer contributed, and
   (2) Category="Transfer:[401(k)]", Amount = negative the same amount. 
The two split amounts offset each other and don't affect your pay. The first line creates income (it's non-taxable, but it's income), and the second line transfers the funds to your 401k account.

If you instead are doing the simple net pay payroll transaction, then you can create a separate scheduled transaction in your 401k account to record the amount of each employer contribution.

-----

If you're still with me, there's one more area to tackle: what detail are you tracking, and how, in your 401k account? If you've created this as a an investment account, what we've discussed so far drops cash in your 401k account. That cash is then invested in the one or more securities in your 401k portfolio. 
The question is whether you want to track the individual securities in your 401k account, or if you're looking to treat the whole thing as one lump.

Typically, you would do the former: create in your Quicken file a security for each of the securities you own in your 401k, then record Buy transactions to "use up" the cash. Quarterly (or monthly), you'd also enter the Reinvest Dividends, Reinvest Short-Term Capital Gains, and Reinvest Long-Term Capital Gains transactions reported by your broker, and verify that your share holdings for each security in Quicken match the share holdings on your statement from the broker. (Alternatively, if your 401k broker is one which support Quicken, you can connect your account in Quicken and have Quicken download these transactions. I enter my transactions manually, but more people probably set up Quicken to download them.)  If the securities are publicly-traded stocks, funds, ETFs, etc., the closing value of each security downloads automatically into Quicken, so at any time, you can look at the portfolio view of the investment account and see the value of your holdings. And at month- or quarter-end, you can verify that your portfolio value in Quicken matches the bottom line on your statement. 

If you're not downloading transactions from the 401k financial institution, and entering every transaction as described above seems like more more work than you want, you could instead create a fake security (call it "My 401k"), and each quarter, you could record a Buy transaction for the sum of all of the payroll and employer matching deposits, reducing your cash balance to zero. And you could record quarterly reinvested dividend and capital gain transactions as needed. You'd also need to manually enter a closing price for your fake security to make the account value match your real 401k account. It's a bit of a kludge built on a kludge, but once you get it set up, it would be pretty easy to maintain.

Sorry if that's too much information! I figured it was best to expose all the issues so you could think about how you want to utilize Quicken and how to proceed. 

jacobs

Yes, you're doing it correctly. Moving money from your checking account to a Roth IRA account is a simple transfer of funds from one asset to another -- which is exactly the transaction you've described entering in Quicken. There's no category; categories are for income or expenses, and this transaction is neither income nor expense. And the money moved isn't taxable, so this transfer won't show up on the Tax Schedule report. (You may need to report how much money you put in your Roth IRA at tax time, but that's an easy enough report to generate from Quicken.)

carsonbeach

Thank you so much, also I have a questions on my 401k contributions which contributions are from both myself and my employer. What do you recommend for using for a category? Currently, for my paychecks (income) I am recording just the net amount in the checking account.

jacobs

If you record your net pay in Quicken, then you have to "manufacture" the 401k contribution. The typical way to record a paycheck is to record the net amount with split lines for your gross pay and your various deductions. Here's a sample:



That may seem like a bit of work, but keep in mind you create the transaction just once and then make it a scheduled transaction for whatever frequency you get paid. If your pay is the same each pay period, that's all there is to it; if you get paid different amounts, you'll have to tab through and edit the amounts, but the structure of the splits will be in place.

In this example, the next-to-last split line shows a deduction from your pay being transferred to the 401k account.

If you don't want to tack your gross pay and deductions like this and don't plan to use Quicken for gathering tax information, you can continue to record your paycheck as a simple net pay transaction. Then you'd create a separate transaction in your 401k account for the deposit of funds deducted from your pay. I'd use the special category of "Adjustment" for such a transaction, because allows you to make money appear "out of thin air" -- e.g. it doesn't show up as income or expense; it just increases your account balance.

-----

So far, this has only talked about the portion of your 401k contributions coming out of your pay. What about the matching contributions made by your employer? You can record this either as an additional split in your paycheck or as a separate schedule transaction. To do it in your paycheck, it's a little tricky because you want to include it as a split line, but it doesn't add to or subtract from your pay. The way I would do this is to create a sub-category of Personal Income for "Employer 401k Contrib." Then you would add two split lines to your paycheck:
   (1) Category=Employer 401k Contrib., Amount = what your employer contributed, and
   (2) Category="Transfer:[401(k)]", Amount = negative the same amount. 
The two split amounts offset each other and don't affect your pay. The first line creates income (it's non-taxable, but it's income), and the second line transfers the funds to your 401k account.

If you instead are doing the simple net pay payroll transaction, then you can create a separate scheduled transaction in your 401k account to record the amount of each employer contribution.

-----

If you're still with me, there's one more area to tackle: what detail are you tracking, and how, in your 401k account? If you've created this as a an investment account, what we've discussed so far drops cash in your 401k account. That cash is then invested in the one or more securities in your 401k portfolio. 
The question is whether you want to track the individual securities in your 401k account, or if you're looking to treat the whole thing as one lump.

Typically, you would do the former: create in your Quicken file a security for each of the securities you own in your 401k, then record Buy transactions to "use up" the cash. Quarterly (or monthly), you'd also enter the Reinvest Dividends, Reinvest Short-Term Capital Gains, and Reinvest Long-Term Capital Gains transactions reported by your broker, and verify that your share holdings for each security in Quicken match the share holdings on your statement from the broker. (Alternatively, if your 401k broker is one which support Quicken, you can connect your account in Quicken and have Quicken download these transactions. I enter my transactions manually, but more people probably set up Quicken to download them.)  If the securities are publicly-traded stocks, funds, ETFs, etc., the closing value of each security downloads automatically into Quicken, so at any time, you can look at the portfolio view of the investment account and see the value of your holdings. And at month- or quarter-end, you can verify that your portfolio value in Quicken matches the bottom line on your statement. 

If you're not downloading transactions from the 401k financial institution, and entering every transaction as described above seems like more more work than you want, you could instead create a fake security (call it "My 401k"), and each quarter, you could record a Buy transaction for the sum of all of the payroll and employer matching deposits, reducing your cash balance to zero. And you could record quarterly reinvested dividend and capital gain transactions as needed. You'd also need to manually enter a closing price for your fake security to make the account value match your real 401k account. It's a bit of a kludge built on a kludge, but once you get it set up, it would be pretty easy to maintain.

Sorry if that's too much information! I figured it was best to expose all the issues so you could think about how you want to utilize Quicken and how to proceed. 

carsonbeach

Thank you so much for your detailed response, that brings a lot of clarity. Currently, my 401k is detailed with all the transactions back to 2000 :). The component that I was a not doing correctly was the offset using the adjustment category. I think the best solution at this point would be for all of my prior 401k contributions is to use the (adjustment category method) and going forward to use the paycheck model. once setup up it will be on more than less cruise control.

I was curious if you use the budgeting function in Quicken and if so how you like it and recommend using it.

Again thank you some much for your help!