do you contribute to a qualified retirement fund
well in that case you should watch this video managing retirement fund transactions
if you have any questions about this topic you can leave them in the comments section below and i'll
do my best to help you and of course if you feel the video helped you i hope you will click like
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retirement fund transactions are very different from any other type of transaction that you have
previously experienced they're not the same as recording transactions in a bank account
or credit card account and you may well ask how are they different well normal bank accounts
you deposit the income that you earn and that will increase the balance and with normal bank accounts
when you pay your normal expenses the balance decreases however with a retirement account
you will deduct as an expense anything that you deposit into the account so that is the opposite
of a normal bank account and for a retirement account you will include in income anything that
you take out of the account and that will decrease the balance so because of this opposite behavior
we need special procedures and i have created a procedure you could call it the mark smolen
method or mark smolin's strategy of recording retirement transactions or retirement fund
related transactions each retirement fund transaction should be recorded two times
once for the effect on the income statement and again to adjust the effect of the balance sheet
now this is because tax rules run differently from normal generally accepted accounting principles
and generally accepted accounting principles are what quickbooks was designed to be used for that's
why we need this special method this method is easy and smooth and will make everything correct
so what happens on your profit and loss when you record contributing to a retirement fund
well the cash in the normal bank account will decrease because you
took money from your normal bank account and you put it into a retirement account
and then you actually have more deductible expenses to reduce your net income on your profit
and loss because you took money from your bank account and you put it into the retirement fund
however for that very same transaction you also have a balance sheet effect you now have an asset
called retirement account balance and that number goes up the balance of that asset retirement
account goes up at the moment that you take money from your normal bank account and put it into that
bank account and as a result of having more money in a retirement fund you also have more net worth
now i will be happy to do a special video in the future explaining why net worth will increase
in the second entry for the very same retirement transaction but net worth
is the account to choose now what happens when you withdraw from a retirement fund well the
effect on your profit and loss is as follows the cash and the normal bank account will increase
because you took money from the retirement fund and you put it into your normal bank account
but you also have an increase in your taxable income because any withdrawal you made
into an uh retirement fund that you had previously deducted will count as income at the moment you
withdraw the money so once you withdraw money from a retirement fund your cash and bank goes
up because you put the money in your normal bank account and your taxable income also goes up
but at the moment you withdraw from a retirement fund something else is happening for that same
transaction the balance of the retirement account goes down because you just took money out of the
retirement fund and your net worth goes down as well because you have less of that asset and again
i will be making a special video explaining why net worth is the other account that changes when
you have a retirement transaction so let's add the retirement accounts we need to quickbooks first we
need a bank type of account which represents the balance of the ira let's go ahead and add that now
from the main menu click list chart of accounts then in the bottom left click account
new this is a bank type of account click continue and we will name it i r a
balance save and close click no for the advertisement and now we have an
account that represents the asset balance what else will we need well we'll need an expense
to record when we take money from our normal bank account and put it into the ira so
we click account new and this is an expense type of account and the name of it will be ira
contributions
and i like to put the word expense there save and close and we also need an income type of account
to represent the money that we take out of the ira which will be part of our taxable income
account new and this is an income account and the name of it will be i r a
withdrawals and we click save and close now we have the accounts we need to record
retirement fund transactions for example let's imagine on november sixteenth
we took three thousand from our normal chase checking account and deposited it
into a qualified retirement programs bank account and in this example that bank account is an ira
so this transaction is so nice we record it twice first for the effect on the profit and loss
and we use the right checks window then again for the effect on the balance sheet and we
use the journal entry window now at the moment we record this the bank account will go down because
you have a deductible expense ira contribution expense and that's what will happen at the moment
we record this check or this transfer so we also know we will use the right checks window
in order to do this you click banking write a check and the date is november
15th excuse me of twenty
sixteen okay and we are contributing
three thousand dollars now watch carefully the money is coming from the normal bank account
to this deductible expense ira contribution expense and don't forget
that this is deductible and includable in your taxes so you have to choose class in this case
now when we click save and close we can open the trial balance and you can see you now have the
deductible expense the three thousand dollar ira contribution and you also have decreased your bank
account by three thousand look double click scroll to the bottom or scroll to november fifteenth
that three thousand deduct lowered the balance of the bank account but we are not finished we now
have to record that same transaction again for its effect on the balance sheet
the retirement account balance goes up for the money that you just put in the account and the
net worth also goes up so watch how we record that we record that in the journal entry window and we
use the same date as the check because it's really part of the same transaction so from the main menu
we click company make general journal entry and the date is the same as the prior transaction
and you must remove this check mark because this is not an adjustment this is an actual
transaction and the account that's increasing as an asset is the ira balance and you make a debit
for three thousand and the balancing credit for three thousand is your original net worth
because your net worth is not changing because of your normal net income so the balancing account
in this case is original net worth if you want you can make a separate equity type of account
just to track the net worth associated with your retirement funds but you don't have to save and
close save anyway and now you can see you have the ira balance which will go on your balance sheet
as an asset and you can see original net worth has increased to fifteen thousand five hundred
now to complete our little story let's do an example where you actually took money
from the ira let's imagine on december 20 joe withdrew 500 from the ira for pocket spending
cash what will happen regarding the profit and loss well the cash on hand will increase
because you now have more spending cash because you just took that money from your ira
account but on the other hand you now have more taxable income and the reason why you have more
taxable income is because if you previously deducted from your taxes what you put into the ira
then when you take out money that you already deducted that becomes income
that you have to include so we will record this first for the december 20 transaction
and we will use the make deposits window watch banking make deposit now the account that you're
actually depositing the money into is your cash on hand remember your cash on hand counts
as a separate account if you're going to track it using the quickbooks software so you have more
cash on hand in your wallet as of december 20 as a result of taking it out of the ira
but the account that you choose is the income account the income account ira withdrawals so your
cash on hand is going up because you have more of this type of income ira withdrawals
500 and because it's income going on the profit and loss you have to choose non-exempt deductible
class to make sure that this gets included in your income to calculate your estimated taxable income
and this is the way you record the first of the two entries when you click save and close you can
see your trial balance reflects more cash on hand and as a result you have this 500 as income ira
withdrawals however you are not finished you have to do the balance sheet side of this transaction
the retirement account balance goes down and your net worth decreases accordingly and i will
make a future video explaining why original net worth is the account to use to balance the entry
and again we use the journal entry window and we put the same date as the deposit
we just recorded because it's really the second half of this transaction
from the main menu we click company make general journal entry the date is the same as the deposit
the account that's changing is the ira balance but now it is decreasing and if this account
is normally a debit balance and it is decreasing that means we have to put it we put the decrease
on the credit side and then the balancing 500
goes to original net worth which is an equity account click save and close and we don't need a
class because they are both balance sheet accounts save anyway and now you can see the ira balance is
correct for what's really in the account and your net your original net worth has been adjusted
accordingly
you