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How best to record RRSP withdrawals?

krichardson100

For any Canadian users out there ...

How best to record a withdrawal from an RRSP, and yet still have Quicken report it as income? A simple transfer doesn't work. My current solution is a 2-entry method: first entry to reduce the balance in the RSP and record it against a "dummy" category, with the second entry to record the gross amount of the withdrawal as RSP income, reduced by the amount of tax paid on the withdrawal.

Any other solutions? Thanks.

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Boatnmaniac

(EDIT: A clarifying comment regarding "IN THE RETIREMENT ACCOUNT" has been added below in italics.)

For tax-deferred retirement accounts in Quicken US (i.e., IRA, 401k) the best practice is as follows. This is not an intuitive process, but it works to capture the dollars correctly for each of the categories.

In the deposit account (i.e., checking):

DEPOSIT: Enter a deposit transaction for the net amount (after tax). This should be a positive amount.

SPLIT CATEGORIES: The sum of the split categories must equal the net deposit amount.

LINE 1: Enter the gross dollar amount (before tax) as a transfer from the retirement account. This should be a positive amount.
LINE 2: Enter the tax withheld/paid dollar amount using the appropriate tax category. This should be a negative amount.
LINE 3+: If needed for other deductions/taxes, enter a new line for each one. These should be negative amounts.

IN THE RETIREMENT ACCOUNT: If the net distribution and tax withheld/paid transactions were downloaded from the financial institution, they will need to be deleted to ensure the retirement account remains in balance. However, any related Sell transactions where the proceeds were deposited solely to the account's cash balance should not be deleted.

In Quicken US, this process properly captures LINE 1 as the total taxable amount and LINE 2+ as the tax paid. I don't know if this will work similarly in Quicken Canada, but you might want to test it out.

Here is a picture of how I structured a recurring Reminder for monthly IRA distributions.

[Edited - Readability]

krichardson100

What's your entry in your investment account?

Boatnmaniac

In the process mentioned in my post yesterday, the first line of the split category in the checking account transaction has a transfer category. A transfer category is the name of the corresponding account enclosed in square brackets. For example, if the name of your investment account is My Investment Account, the transfer category for that would be [My Investment Account].

Then, if you enter [My Investment Account] as the category for line 1 of the split category in the deposit transaction in the checking account (let's call it My Checking Account), a corresponding but opposite dollar amount transaction will be automatically entered into the register of My Investment Account. This corresponding transaction in My Investment Account will have a transfer category of [My Checking Account].

So, if Line 1 of the split category in the deposit transaction in My Checking Account has a transfer category of [My Investment Account] in the amount of +$1000, then it will automatically enter a transfer-out transaction in My Investment Account of -$1000 with a transfer category of [My Checking Account]. In doing it this way, the 2 transactions are always visibly and actually linked to each other.

Quicken US does a good job of capturing distribution transactions out of tax-deferred accounts as taxable net distributions. But it does not capture expense transactions as taxable events, so tax withheld/paid (an expense) is not included as part of the taxable gross distribution. Entering the distribution transaction into the checking account as mentioned in my post of yesterday is a workaround that corrects for this issue and which many consider to be the best practice (however, using the dummy account process you've been using also works but it is a bit more awkward and time consuming).

Quicken is planning to improve upon this process, but they have not stated how nor when that will be done. I am assuming that this planned improvement will be made to all applicable editions of QWin and QMac, including US and Canada… at least I hope that will be the case.

As a final comment: As stated in my post of yesterday, all of my comments here are applicable to QWin US. I am assuming/hoping that this process will also be applicable to QWin Canada, but you will need to test it out to verify that.

(BTW, I made a clarification edit in my post from yesterday. That edit is in italics.)

[Edited - Readability]

Sceptic

@krichardson100 The transfer method that @Boatnmaniac suggested is certainly one way to record the transaction. Another approach is to leave the downloaded RRSP withdrawal transaction intact and record the deposit separately in the receiving account.

With this method, the deposit can be entered as a split transaction that reflects the gross withdrawal amount along with any tax withholding, while the net deposit matches the amount actually received. One advantage is that it preserves the original downloaded transaction in the RRSP account rather than replacing it with a manually entered transfer.

Some users prefer this approach because it maintains the downloaded record from the financial institution and provides clear visibility into the gross withdrawal, withholding tax, and net amount received.

RRSP account

Withdrawal of the gross distribution amount.
Reduces the RRSP balance.

Chequing account

Deposit transaction.
Split lines:
- Gross RRSP withdrawal coded to the appropriate taxable income category/tax line.
- Income tax withheld coded to a tax-withholding category.
- Net deposit equals the amount actually received.

krichardson100

Thanks guys.

Unfortunately, Boat's method does not result in the RRSP income being assigned to an income category, which is what I was searching for. Guess the two-entry method I'm using (and which Sceptic reiterated) will have to be the way to proceed at the moment.

Thanks.

Sceptic

@krichardson100 I reiterated the two-entry process because I didn't quite understand what you meant by "dummy category". The category I created is called "Withdrawal," which has no tax coding or tax lines associated with it. I guess it could be considered a "dummy category" because all it's doing is recording the RRSP withdrawal.

[Edited - Readability]

Boatnmaniac

https://community.quicken.com/discussion/comment/20583993#Comment_20583993

Ah, so it is the "income" aspect of it that you want. Technically, it is not really income. The income was earned long ago when the contributions were originally deposited into the accounts. It is only the Gov't that treats it as income for taxation purposes, and that is only when the money is distributed from the investment account, which is why the Gov't refers to it as deferred income. But for most every other purpose (including for such things as loan applications) it was income at the time that it was originally earned.

Quicken's default is to classify something as income when it increases net worth and as expense when it decreases net worth. As such, transfers between accounts, whether they are from an investment account to a checking account or from a checking account to a credit card or loan account, are cash flow transactions, not income or expense transactions. And in most Quicken reports, they will be listed as transfers, not income or expenses.

That all being said, there are some people who want distributions from tax-deferred investment accounts to be categorized as income, not transfers. For people wanting this, the process I'd spelled out would not meet that requirement. Instead of being transfers, they will somehow need to be categorized as income. The process you and @Sceptic mentioned would be perhaps the best way of accomplishing that.

[Edited - Readability]

krichardson100

@Boat, it's considered income in Canada - taxed & treated just as regular earnings.

And @sceptic, I also called my dummy category "withdrawal", lol.

Boatnmaniac

@krichardson100 -

….it's considered income in Canada - taxed & treated just as regular earnings.

What I read about RRSP is that it is very similar to the US IRA, 401(k) and 403(b) retirement plans. The income is actually earned at the time the contribution made to the retirement plan. But the gov't defers reporting it as taxable income on tax returns until the money is later distributed from the plan. For everything else outside of gov't tax returns it was still considered to be income at the time it was originally earned.

As I'd posted earlier, there are 2 trains of thought regarding these plans.

One that views the distributions as being simply transfers of the cash assets from the retirement plans that, except for tax return purposes, was earned long ago. This is how Quicken is designed to treat them.
The other which views the distributions as being income at the time of the distribution but not income back when it was actually earned. Quicken can accommodate this but only by doing workarounds like you've been doing.

Bottom line is that it is a personal preference as to which train of thought we follow. So if that works for you, then great. But I'm curious, setting aside the taxation question, do you consider distributions from regular investment accounts or savings accounts to be income, too, or are they simply transfers of cash assets between accounts?

krichardson100

"do you consider distributions from regular investment accounts or savings accounts to be income, too, or are they simply transfers of cash assets between accounts?"

Like most things in life, it depends, lol. Dividends, interest, etc. earned in a regular investment account are taxable earnings, as would any capital gains realized. Transfers from a regular investment account to a chequing account would be tax-free. All earnings within an RRSP investment account are held tax free in that account until such time as they are withdrawn - paid to the owner - at which point they are taxed just like earned income. At age 71, there is a mandated minimum withdrawal percentage that increases each year until age 95 (I think?) when the plan would be fully exhausted.

We also have TFSA's (tax-free savings account) - badly named, as they're not limited to savings account. No tax deduction up front for contributing, but ALL earnings & contributions in the TFSA including capital gains can be withdrawn tax-free.