unofficial microsoft.public.money FAQ and A
[ Home ]

How to do things in Money: Financial Situations

Q) I'm distributing my 401(k)/withdrawing from my IRA--how do I categorize the transfer as income?

A) The question frames the issue. This transfer from a tax-deferred Investment account to a Cash Account is not Income in the accounting sense. It's already your money. You didn't get richer by moving it from the tax-deferred account to the cash account. Thus, in the accounting sense favored by Money, Transfer is correct and categorizing it as Income isn't correct. But the problem is that the IRS treats money coming out of the tax-deferred accounts as taxable earned income. (Even that is a muddled picture. If the principal includes after-tax contributions, then not all of the distribution/withdrawal is treated for tax purposes as taxable earned income.)

While the Tax Estimator in Money is smart enough to ignore various earnings in the accounts set as tax-deferred, it isn't smart enough to deal with distributions/withdrawals from these accounts. (The before/after tax contributions problem may be one of the reasons they've elected to "not go there.")

So how do you get Tax Estimator and the tax reporting to deal with your distribution/withdrawal?

There are a number of possible ways, each of them imperfect. Possibilities include:

You can use some tool besides Money to manage the tax estimating. Excel is frequently a handy tool to have around to solve things Money can't.

You can enter the income in Tax Estimator by hand. You can do this buy going into Tax Estimator, on the Income page. click on the Wages income link, and then use the option to add additional income that's not in your Money file.

If you do not have an Investment Cash Account associated with the Investment Account that you are selling down, your choice is probably limited to the "two transaction" method posted by Cal Learner--MVP. This is doing the Sell transaction with no Transfer To account for the proceeds in one transaction and doing an Income transaction, for the same amount, in the cash account receiving the funds. One downside to this is that the transactions are not joined in any logical way in Money, only in your head.

You can use the "unassigned split" option posted by Michael Gordon. Here you to have the Transfer from the Investment Cash Account be part of a split with a similar amount categorized as some Income Category that is set to work and play well with the Tax Estimator, etc. The split is unbalanced--the elements don't add up to the transaction net--to keep from "creating" money. Say the transferred amount is $2,000; the split would have the $2,000 transfer and $2,000 of income--adding up to $4,000, not the $2,000 desired total for the transaction. You'd tell Money you know there is unassigned income in the split and you really want to do it that way when it complains.

If the unassigned split offends your sense of precision, a variant of this is to add a separate expense to balance the transaction against some made-up expense category, say Miscellaneous : Tax-Deferred Income Offset.

Jeff M suggested an interesting alternative to these last two: use a Paycheck transaction. In this case, you'd probably have to enter the Paycheck in the account that you are transferring the money to. (The umpmfaq has not tested this to see which works best with Tax Estimator.) The Paycheck would have some income on the wages tab, the after-tax tab would have a Transfer from--in a negative amount--the Investment Cash Account. You could either save the transaction with unassigned income or have the bogus offsetting expense category. This method might also prove valuable for 401(k) distributions, since these distributions are typically required to have taxes withheld. This tax withholding could be entered directly in the Paycheck transaction. Likewise, using a Paycheck would provide a ready model for separating the before taxed income portion of a distribution and the after-tax, i.e., already taxed, portion.

Please see this disclaimer if you are using Money 2005 or this comment if you are using Money 2006.

If this kind of stuff is important to you: