How to categorize IRA withdrawals

I am wondering how to categorize IRA withdrawals. For a single transaction, I get 4 entries in my Transactions sheet. Here is an example. The 4 entries are listed order by Amount/Financial Entity/Numeric Sign:

$3,003.00 / Bank (Checking Account) / Positive
$3,003.00 / IRA Account / Negative
$847.00 / IRA Account / Negative
$3,850.00 / IRA Account / Positive

What this represents is is a withdrawal of $3,850.00 from the IRA, paying $847.00 in taxes, resulting in $3,003.00 going into my checking account.

I have been using 3 Categories for these transactions: IRA Withdrawal (Income); Transfer (Ignored for Reports), Tax Payment (Expense).

It is clear that the taxes go into the Tax Payment category. But not sure about the other 3 transactions.

Any thoughts on how to categorize these items so they make sense in the monthly/annual reports?

Thanks.

Hi @finances:

What a great question…Situations like this illustrate the natural tension between the Tiller Transaction sheet and double-entry accounting. Complexity can increase when you try to accommodate the idea of reporting debits and credits equally.

But Tiller offers a more simple, yet powerful solution: categorize the net of activity in your primary operating accounts-checking, savings, credit cards, etc. and allow your Balances sheet to report changes in the value of all other assets or debts.

For circumstances like this, I use a category called, Investment Transactions. The Investment Transactions category has no budget and is hidden from reports, assigned to the Transfer type. In keeping with your structure, In the illustrations following, I will use your category name, Transfer.

Given this, if you wish to only bring the impact of your net deposit into your budget, I would budget and categorize your four transactions this way:

$3,003-bank deposit (positive) Category: Income
$3,003.-IRA balance reduction (negative) Category: Transfer
$847 -IRA taxes (negative): Category-Transfer
$3,850-(positive) IRA Category-Transfer

If you want to budget and track the taxes as an expense, (preferred) you’ll need to budget and categorize the gross withdrawal amount as income instead of the net, like this:

$3,003-bank deposit (positive) Category: Transfer
$3,003.-IRA balance reduction (negative) Category: Transfer
$847 -IRA taxes (negative): Category-Taxes
$3,850-IRA (positive) Category-Income

Using either method, your IRA balance will be reduced by $3,850 on your Balances sheet, and the cash flow impact of your deposit in your reports will be measured at $3,003.

There are many ways to handle this, as you can imagine.

Does this help?

I’m particular about keeping my budget categories optimized for taxes, so I would do a split transaction and breakout the $3,003 that hits the bank account to show $3,850 of IRA withdrawal (income) and $847 to a federal tax category.

The other ones I’d throw in a non budget category, as they’re not going to impact cash flow.

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Thanks very much Brad for the detailed explanation.

Much appreciated!

Thank you Kathryn! I appreciate it.

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