Budgeting: Considering 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. Generally speaking, unless you are of retirement age, the funds in your retirement account are not available to you.  This  is true of qualified plans, IRAs, pensions and most 401(k)s.  While you may be permitted to borrow against your account, this is a loan that will have to be paid back.  It is common for loans against retirement plans to be paid back via payroll deduction to avoid any chance of default.  While there are triggering events that allow account owners to cash out their retirement plans, doing so imposes stiff penalties and taxes.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  Because of this, the amounts deposited into a Roth IRA can be withdrawn without penalty at any time.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  The profits from funds invested and rollovers may not be withdrawn and should not be included in this calculation.By incorrectly counting the funds that are being contributed to and held in retirement plans, you can radically impact your cash flow calculations.  Failing to treat the funds you deposit into a retirement plan as an expense can give you a misleading look at your cash flow situation.  Likewise, you may create an overly negative look at your cash flow position if you fail to correctly account for contributions into your Roth IRA.