Revisit RMD/MRD distributions to recognize distributions - deferred income not transfers

andyc3andyc3 Member

This note responds to various attempts to understand the
arcane treatment of distributions from IRA (and 401k/403b) accounts within
Quicken. The current treatment calls for recording the distribution not in the
originating tax-deferred account but in the receiving taxable account. Quicken
asserts two reasons for this required treatment of distributions: 1) it avoids
taking “taxable” distributions from a tax-deferred account; and 2) it provides
consistency with the proposition that retirement distributions are a transfer,
not income.

As I will discuss below, neither of those reasons is valid
or even consistent with standard practice within the financial services firms
that serve as trustees of these tax-deferred account.

SuperUser JM (among others) makes the point that retirement
distributions are not “income” in the traditional sense but transfers.  JM’s idea is that all the earned and unearned
(market value + dividends+interest) income actually belongs to him and
therefore a distribution from that net worth is a transfer.

However, tax deferred accounts are all constructed as
trustee accounts. Individual contributors don’t directly “own” the worth of the
accounts although they are the recipients of
distributions from those accounts and beneficiaries are entitled to residual funds. If one doesn’t “own” the accounts, they are
not part of one’s wealth and a distribution is not a transfer but recognition
of deferred income. The contents of a tax-deferred retirement account only adds
to net worth when and as it is distributed. 
This construct is how the tax code and enabling legislation view tax
deferred accounts.

Take a simple legislative, though politically untenable,
thought experiment: Suppose Congress were to pass legislation that requires
100% taxation on all non-MRD/RMD distributions from pre-tax IRAs/401k/403b accounts. Don’t
worry about constitutionality challenges or the likelihood of this. The result
of this putative congressional action is that your “net worth” held in those
accounts is now zero. If the rate were 90% rather than 100%, your net worth
would be decimated rather than obliterated. The point is that until
distributed, those funds in trust are not really part of one’s net worth except
in a trust sense. Further to this point, those funds are more (401k) or less
(IRA) protected from creditors in ways that your standard (not in a Trust
regime) net worth is not. Why? Because the money in the tax-deferred accounts
doesn’t yet belong to you, it is held for you by the account trustees until
distributed as deferred income.

So what does Quicken have to do?

Quicken needs to enable, and recognize distributions
directly from tax-deferred accounts as income and to support tax-related
categories for tracking use of that income. Financial services firms routinely tap
the corpus of a distribution to pay designated Federal and State taxes, for
example, on MRD distributions. This income needs to be correctly reported as a
separate line item when Quicken reports income data.  To be sure, tax deferred accounts may need
only a few (or limited) action options, but income recognition and association
with the correct tax form line items needs to be one of them. This type of
change would remove the absurd dance that forces manual creation of transactions
in receiver accounts and manual deletion of the native transactions in the
originating accounts. It would also restore correct and complete income
reporting.

Fixing the above would add value to Quicken as its user pool
of baby boomers starts taking RMD/MRD distributions next year.  Currently, Quicken treats tax-deferred
accounts in a way that is easy to understand but is intrinsically inconsistent
with both the structure and tax treatment of those tax-deferred accounts. I
suggest that Quicken undertake a bottom-up review, and possible revision, of
the business logic and rules that govern the application’s treatment of data
held in tax-deferred accounts of all types (i.e., look at Roths as well as
traditional tax-deferred).

[Based on Quicken 2015 Home+Business]
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Comments

  • HersheyHershey Member
    edited February 2018
    I have been trying to make this point with Quicken for a year now. You have made the point very clear. Hopefully maybe clear enough for Quicken to correct their absurd treatment of tax deferred accounts.
  • Bob_LBob_L SuperUser
    edited April 2018
    I take RMDs and the income is properly reported in my reports. I have the appropriate tax schedule set on the transfers out. I deal with withholdings in the deposit transaction in my checking account. While not particularly intuitive, it does work.
    Quicken Premier Subscription, Windows 10 Pro
  • HersheyHershey Member
    edited May 2018
    But Quicken reports gains, dividends, and interest within the Ira as income when it occurs.
  • fanfarefanfare Member
    edited October 2018
    You will get correct and complete income reporting, including the Tax Summary, with the following two-step approach

    From the tax-deferred account
    image

    From the Cash account
    image
  • q_lurkerq_lurker SuperUser
    edited March 2017
    Hershey said:

    But Quicken reports gains, dividends, and interest within the Ira as income when it occurs.

    But Quicken reports gains, dividends, and interest within the Ira as income when it occurs.
    Not to hijack this discussion and to skip over the andyc3's point on ownership, gains, dividends, and interest in IRA accounts are income when they occur.  The fact that they are not taxable income is managed by properly setting up the reports.  By default, the tax reports are set up to omit those types of accounts.  
  • fanfarefanfare Member
    edited March 2017
    Hershey said:

    But Quicken reports gains, dividends, and interest within the Ira as income when it occurs.

     I want to know the dividends and interest on my tax-deferred accounts. In this economy I may need to withdraw them to live on and not invade capital.
  • Mojo.HandMojo.Hand Member
    edited February 2018
    This reply was created from a merged topic originally titled Wish list for RMD withdrawals.


    Quicken for Windows needs a wizard to handle two types of IRA withdrawals.

    One


    is an IRA to Roth IRA conversion withdrawal. The whole amount converted


    is taxable but the amount  transferred into the tax-free Roth IRA


    account is less any withholding for taxes to IRS or State.

    The


    second is an RMD (Required Minimum Distribution) withdrawal; the amount


    transferred (taxable income) goes to a taxable account (could be a brokerage acct.) less any withholding for taxes to


    IRS or State.
  • RonRon Member
    edited February 2018
    This reply was created from a merged topic originally titled RMD's.


    Good thinking!  RMD's: This is an excellent suggestion. I hope "someone" hears you.

    Note: This conversation was created from a reply on: Wish list for RMD withdrawals.
  • Jim_HarmanJim_Harman SuperUser
    edited November 2018
    This reply was created from a merged topic originally titled RMD's.


    FYI, I think the Roth conversion can be handled manually as follows.

    1) In the source Traditional IRA account, edit the account details, click on Tax Schedule, and make sure Transfers out is set to 1099R - Total IRA taxable distrib.

    2) Sell the securities in the TIRA to produce the conversion amount.

    3) Withdraw the full conversion amount from the TIRA, selecting the [Roth account] as the Category. This will transfer the cash to the Roth account, and the full conversion amount should show up in the Tax Summary report and the Tax planner.

    4) In the Roth account, enter MiscExp transactions for any withholding, selecting the appropriate tax categories. Recording the withholding on the receiving end makes sure the full conversion amount is recorded as taxable.

    5) Buy securities as appropriate in the Roth account.


    Regular distributions from a TIRA can be handled similarly, except that the destination account will be one of your taxable accounts. If the destination is a banking account, you can show the withholding amounts as splits with negative amounts, which will reduce the amount deposited in your account.

    Note: This conversation was created from a reply on: Wish list for RMD withdrawals.
    -- Jim QWin Premier subscription
  • q_lurkerq_lurker SuperUser
    edited May 2018
    This reply was created from a merged topic originally titled RMD's.


    Distributions from IRAs are not so difficult.https://getsatisfaction.com/quickenco...

    Note: This conversation was created from a reply on: Wish list for RMD withdrawals.
  • Jim FormanJim Forman Member
    edited July 2018
    fanfare said:

    You will get correct and complete income reporting, including the Tax Summary, with the following two-step approach

    From the tax-deferred account
    image

    From the Cash account
    image

    As clunky as this method is, I guess I'll have to use it to have accurate income/expense reports, until Quicken gets their act together on accounting rules for RMD's transferred to other accounts like checking.  These distributions are clearly both income and taxable.
  • robrob Member
    edited October 2018
    fanfare said:

    You will get correct and complete income reporting, including the Tax Summary, with the following two-step approach

    From the tax-deferred account
    image

    From the Cash account
    image

    When I carry out the approach outlined above my Q17 does not recognize the transferred amount as income.  It shows up correctly in my checking account and I can deduct taxes correctly but there is no way to associate it with any of my income categories in the Income vs Expenses table available in the Home tab. 

    I have devised a very klutzy way using an artificially created account to receive the transfer from the IRA account and from there transfer it into my checking account using the proper categories.  The artificial account accumulates non-existent funds so I have to make sure it is not counted in financial reports.
  • fanfarefanfare Member
    edited October 2018
    fanfare said:

    You will get correct and complete income reporting, including the Tax Summary, with the following two-step approach

    From the tax-deferred account
    image

    From the Cash account
    image

    Yes, you're right it does not show as Income so maybe I over-advertised, it shows up in the Transfers section. But it shows the gross amount there which is the amount that will appear on your 1099-R document.
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