Tracking Investment within Retirement Accounts

gdfein

I realize that for a taxable brokerage account, buying/selling securities, reallocations within an account, dividends, interest, etc, that all of these (and many more) impact taxable income, basis, etc.

However using this same logic on tax advantaged accounts; HSA's, 529's, Roths, 401k, VULs, etc., accounts either tax free or tax deferred are misleading. I have two small brokerage accounts that are taxable and Quicken handles those fine. However, most of my NW is in tax advantaged accounts and when I look at Account Overviews-Holdings-Value, the Cost Basis and thus G/L are misleading. Many investors if using target allocations, will have rebalancing cadence, which means these accounts are seeing period buy/sell within the account, which is a wholly non-taxable event, but Quicken assumes that basis of the investment in the accounts is changing as if the resulting gain or loss at a rebalance is taxable and increases/decreases basis of the securities, and thus the account has changed. This patently not the case. Basis is contributions less distributions, plus/minus taxable events (if any).

A perfect Example is my HSA and 529 plans where I have made small steady investments in these accounts over the past 10years, have never taken a distribution. My HSA is worth $75k, has had $50k of contributions since inception, so I know the gain is $25k. Yet due to rebalances over time, the cost basis in my investments is tracked as $68k, and thus only $7k of gain. This is simply not correct. Now in the case of a taxfree account, this may be moot and only informationally misleading, if the accounts are ultimately used for taxfree purposes, and thus the unrealized gain in the account is never taxable.

However, with deferral based retirement accounts, this may be much more serious as there is a deferred tax impact associated with the unrealized gain in the account, that using this same math will be possibly understating.

Is there a way to fix how Quicken behaves? I realize gain/loss REPORTS ignore retirement accounts. But its not a reporting issue, its a data handling issue.

NotACPA

A rebalance presumably involves a sale of one security and buy of another. Those actions impact your cost basis as the new security will have a basis of it's purchase amount … not the amount originally contributed to the account.

Sounds to me like your gain IS $7k

gdfein

I agree that a rebalance is a sale and purchase of differing securities.

Say the example above is in a 401(k) account, but with no employer match and no pre-tax contributions. The $50k of after-tax cash contributed is the cost basis in the account, then if rebalanced quarterly inside the IRA with purchases and sales of the various investments to maintain a target allocation %. Now the FMV of the total account is $75k, but due to the rebalancing, Quicken says my cost basis is $68k? Quicken is assuming that the gain or loss on each rebalance transaction was a taxable event at the time when the rebalance transactions occurred. But that is not how the taxation of these accounts function. Taxation looks at FMV and Basis of the account, when distributions are taken in the future.

If you think that the taxable gain amount is $7k then you are mistaken. The taxable gain in the account is the FMV of $75k minus the contributed basis in the account of $50k….thus the gain subject tax is the full $25k.

If you further complicate the example with the even more common scenario that has pre-tax contributions and un-taxed employer matches, Quicken will also treat these amounts as cost basis in comparing to FMV for gain/loss determination, but these "basis" amount are also taxable in the future.

Chris_QPW

I think this kind of discussion has come up many a time even reference to taxable accounts.

And it really comes down to "Quicken doesn't track that", at least not using "cost basis".

Some people want to know "I have put X amount of money into my account over the years, what is my gain as would be reported by my broker?"

Other than maybe an account balance/net worth kind of report.

The cost basis in Quicken is always going to be by the tax rules, because it has no meaning in nontaxable account.

You can't look at the difference between it and the current value and say "this is how much my investment has grown".

And the fundamental reason you can't look at the cost basis and make a judgment for "how much has much an investment has grown" using the cost basis it because the number is a calculation to get how much tax you owe, not to tell you if the investment is doing good or something. It is like believing that only what is taxed is your actual income. The IRS' idea of income and an accounting/personal idea of income are completely different.

There are other calculations in Quicken like IRR and such that might be more of what you want, and other better experts on investing and Quicken's investment calculations might be able to help, but there isn't any way you can use "cost basis" the way you are trying to use it.

q_lurker

Taxation looks at FMV and Basis of the account, …

That bolded phrase is the gist of the misperception, in my opinion. There is not a cost basis “of the account”. Cost basis is only computed at a security level. The only cost basis “of an account” is as a sum of the values for the individual securities within the account.

Further, Quicken has chosen to compute cost basis for a security in a consistent manner without regard to the account type holding the security. I believe that is the right decision and approach. I understand some financial institutions (Fidelity in particular) choose differently.

In my opinion, the best measure of performance Quicken offers in the direction you are seeking is the Average Annual Return (aka IRR, internal rate of return) done on an account level. I find the Investment Performance Report the most flexible tool to present those values. Portfolio view can also show such values.

NotACPA

"The cost basis in Quicken is always going to be by the tax rules, because it has no meaning in nontaxable account."

Sure it does, for investment performance purposes.

Chris_QPW

https://community.quicken.com/discussion/comment/20423423#Comment_20423423

I probably stated that incorrectly. I think @q_lurker statement is much better than mine.