How Should You Account For Retirement Accounts In Your Cash Flow?

When calculating your individual cash flow position the income considered is actual liquid income or money that you actually have access to and can use. This means that contributions to retirement plans should generally not be considered as part of your income, but as an expense. Although companies often include their pension plans in their cash flow calculations, this is incorrect for calculating personal cash flow.

In general, until you reach the age mandated by your plan, most retirement plans are effectively off limits to most people. This is true of formal pensions and qualified plans as well as most 401(k)s, 403(b)s, and Individual Retirement Arrangements (IRAs). Many of these plans do allow their owners to borrow from them, but these borrowings have to be paid back and this is frequently done through increased payroll deduction, meaning the borrower has no option of defaulting. Further, there are “triggering events” that allow the owners of such plans to cash them out, but to do so involves penalties and dramatic tax consequences, meaning that a lot of money is lost by cashing out early.

Though most retirement plans do constitute actual assets that should be reflected in your Net Worth Statement ; the amount paid into these plans should be considered an expense for the purposes of determining your cash flow. This is because usually there is no option to not pay into the plan, but in general you cannot access the money. Further, profits made inside a retirement vehicle cannot be added to your cash flow income either, for the same reasons. Even though the money is there and you may have some access to it in an emergency, for all intents and purposes it is untouchable until you qualify for regular withdrawal.

Roth IRAs are the exception to this rule. This is because unlike other retirement accounts, the funds place into a Roth IRA are taxed at the time of deposit. Once the funds are inside the Roth IRA, they can be invested and the profits are not taxed. Because of this, the amounts deposited into a Roth IRA can be withdrawn without penalty at any time. Because of this, the amounts deposited into a Roth IRA are easily available and should be considered liquid cash. The profits from funds invested and rollovers may not be withdrawn and should not be included in this calculation.

From this article, it should be clear that retirement accounts deserve special consideration when calculating your cash flow position. It is imperative that you count funds being deposited into traditional plans as an expense to get an accurate view of your position. In the same way, funds placed into a Roth IRA should be properly accounted for.

By: Vincent Polisi

Article Directory: http://www.articledashboard.com

Vincent Polisi is the founder of Credit Repair College. To learn more about how to www.creditrepaircollege.com/2009/raise-credit-score/”>raise credit scores and www.creditrepaircollege.com/2009/how-to-fix-credit/”>fixing bad credit please visit him on the web.