Questions on solo 401k accounts structure / set up

[Bman Q]

Hello everyone,

As always i want to thank Martin and all community for beancount,

i am so glad that 3.5 years ago i've chosen beancount over other free (gnucash, etc) or paid (quickbooks, etc) alternatives. Extendability and flexibility of beancount are unmatched.

And as always i have couple questions :) Please help :)

1. I have single member llc (sole proprietor), when i make solo 401k contribution (salary deferral and profit sharing parts) effectively i simply transferring funds from my one account (business) to my another account (tax deferred),

so do i simply have following journal entry

2020-05-15 * "solo 401k contribution"
  Assets:BusinessChecking                                         - 24500 USD
  Assets:PreTax401k:CSchwab:Cash                           24500 USD

?

(i have 2 sets of books, and for LLC "tax" books i do following journal entry

to make it easy for me do taxes:

2020-05-15 * "solo 401k contribution"

  Equity:401kProfitSharing                                               5000 USD
  Equity:401kSalaryDeferral                                           19500 USD

  Assets:BusinessChecking                                         - 24500 USD

here i am trying to understand what i should track for myself to make records useful)

2. Do i understand it right that

- i also should create separate 401k income account Income:PreTax401k:CSchwab:Gains 

(separate from my regular brokerage account Income:CSchwab:Gains)

-and that all gains / losses from this account will be ignored tax wise for now

(won't be included on my 1040 until i take money from it when i am old person)

3. When checking Martin's example file i saw he uses "IRAUSD" currency for 401k,

could someone explain why? What's the idea behind it? (comparing to using USD)

4. Any other tips / advises you can give regarding 401k books ?

Thank you

[redst...@gmail.com]

1. I'd suggest booking it "through" an Income account to make it convenient for reports that need to know what your income was (eg: while doing taxes, calculating income across the years, etc.).

Assets:Bank -> Income:Tax-Deferred -> Assets:401k

2. Correct. And that's the account hierarchy I've used for a long time and find convenient.

3. Can't speak for Martin, but my guess is, money in a 401k is "partially owned by IRS" given every single dollar in it is subject to taxes upon withdrawal. Tracking it with a different currency makes it easy an intuitive to account for that. For example, if you know you'll be in the 30% tax bracket on retirement, you can set the price of one IRAUSD to be 0.70 USD, which makes your net worth calculation a bit better.

If this is the motivation, I personally use an alternative mechanism for this purpose, shown in Fava investor. See ` asset_allocation_tax_adjustment` in https://github.com/redstreet/fava_investor/blob/master/example.beancount

[Ben Blount]

3. IRAUSD - another possible reason would be to track total basis dollars across all positions in the IRA. Roth IRA early withdrawals is penalty free until you start getting into any earnings, so it's useful to know how much you put in and paid taxes on.

4. Other notes - cost basis in an IRA is usually AVERAGE cost basis. Vanguard for example uses average basis exclusively in IRAs last I checked. I added support for it, but we had to revert it for a performance issue on very large ledgers. I never put in the work to fix that and get it re-merged, but I do use it extensively myself. You can use it in https://github.com/beancount/beancount/tree/average_booking_rollback if you like.

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[Martin Blais]

On Thu, Oct 28, 2021 at 6:45 PM Bman Q <mpl...@gmail.com> wrote:

Hello everyone,

As always i want to thank Martin and all community for beancount,

i am so glad that 3.5 years ago i've chosen beancount over other free (gnucash, etc) or paid (quickbooks, etc) alternatives. Extendability and flexibility of beancount are unmatched.

Thank you BmanQ! I'm glad this accounting library is able to help you.

 

 

And as always i have couple questions :) Please help :)

1. I have single member llc (sole proprietor), when i make solo 401k contribution (salary deferral and profit sharing parts) effectively i simply transferring funds from my one account (business) to my another account (tax deferred),

so do i simply have following journal entry

2020-05-15 * "solo 401k contribution"
  Assets:BusinessChecking                                         - 24500 USD
  Assets:PreTax401k:CSchwab:Cash                           24500 USD

? 

(i have 2 sets of books, and for LLC "tax" books i do following journal entry

to make it easy for me do taxes: 

2020-05-15 * "solo 401k contribution"

  Equity:401kProfitSharing                                               5000 USD
  Equity:401kSalaryDeferral                                           19500 USD

  Assets:BusinessChecking                                         - 24500 USD

here i am trying to understand what i should track for myself to make records useful)

I'm not sure. What does the IRS require you to declare? I think that's the answer.

Now if I were you, in the personal account I wouldn't casll this "Assets:BusinessChecking" but instead would categorize it as Income:Business:401kContribution or somesuch.

On the business side, that's an expense, no? So I'd replace the Equity accounts by expense accounts.

(In general, you should have very, very little explicit transactions to an Equity account and they should look like exceptional transactions that occur rarely and for adjustments.)

  

2. Do i understand it right that

- i also should create separate 401k income account Income:PreTax401k:CSchwab:Gains 

(separate from my regular brokerage account Income:CSchwab:Gains) 

-and that all gains / losses from this account will be ignored tax wise for now

(won't be included on my 1040 until i take money from it when i am old person)

Yes, and yes, but personally I still account for these using cost basis so that I can calculate P/L.

One problem is that brokers don't need to report cost basis for those accounts, so they tend to provide much less support for tracking that, and so you end up using average cost basis tracking on closing transactions.

3. When checking Martin's example file i saw he uses "IRAUSD" currency for 401k,

could someone explain why? What's the idea behind it? (comparing to using USD)

This is a fictional currency used to track "Dollars eligible to contribute to the IRA."

You have a maximum; at the beginning of each calendar year you reset it.

Track it in parallel with the contributions (mirroring them).

Allows you to track how many remaining contributions you are eligible to make.

You don't really have to use it nor its mirroring, it's just a convenience.

 

4. Any other tips / advises you can give regarding 401k books ?

Maximize your 401k. Maximize your Roth. Even if the investment choices are subpar in there.

The absence of taxes makes those returns hard to beat at least compared to regular passive investing returns.

Thank you

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[Bman Q]

guys hi, thank you for all replies!

i got everything except the "cost issue" part:

"cost basis in an IRA is usually AVERAGE cost basis. Vanguard for example uses average basis exclusively in IRAs last I checked."

AND

"One problem is that brokers don't need to report cost basis for those accounts, so they tend to provide much less support for tracking that, and so you end up using average cost basis tracking on closing transactions."

Do you mean brokers don't report price at which position in this or that instrument was opened?

If yes, shouldn't i have no this issue cause i (as solo 401k) am plan administrator and will be opening / closing positions

and thus know the price i purchased stock at?

Or am i missing something?

[Martin Blais]

On Thu, Nov 11, 2021 at 7:06 PM Bman Q <mpl...@gmail.com> wrote:

guys hi, thank you for all replies!

i got everything except the "cost issue" part:

"cost basis in an IRA is usually AVERAGE cost basis. Vanguard for example uses average basis exclusively in IRAs last I checked."

AND

"One problem is that brokers don't need to report cost basis for those accounts, so they tend to provide much less support for tracking that, and so you end up using average cost basis tracking on closing transactions."

Do you mean brokers don't report price at which position in this or that instrument was opened?

No I mean that when you close a position, brokers don't report which lots were closed, so it's up to you to choose how much basis to reduce, and the typical thing to do is to remove at the average of the entire position's cost basis.

 

If yes, shouldn't i have no this issue cause i (as solo 401k) am plan administrator and will be opening / closing positions

and thus know the price i purchased stock at?

You can account for it any way you please. You can use STRICT booking if you like.

 

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[Bman Q]

"No I mean that when you close a position, brokers don't report which lots were closed, so it's up to you to choose how much basis to reduce, and the typical thing to do is to remove at the average of the entire position's cost basis."

i see, so basically if i had 100 MSFT shares purchased at $100, and 100 MSFT shares purchased at $200,

then sold 50 shares at $400, i won't know (cause it's not reported) shares of which lot were sold, right?

So i would have to use average cost basis (in this case $150).