Comparing net worth with taxable vs tax deferred accounts

[Fermion]

I think for modest portfolios like $1,000,000 you don't even need to worry about taxes, so treat both accounts the same.

Married couple, standard deduction 2 personal exemptions. $10,000 from portfolio in dividends, $15,000 in interest, $15,000 in LTCG. Federal tax paid $0, Florida state tax paid $0.

 

[Huston55]

You people need to find a worthwhile hobby...

Says the guy who averages ~8 posts/day for 12 years straight.

 

[mathjak107]

A retired couple with the extra deduction at 65 can pull around 35k in retirement money and pay under 1500 bucks in tax on it.

 

[braumeister]

My spreadsheet projections include a mini tax return that computes taxable income and federal and state taxes so my taxes are in my expenses for planning purposes.

What a nice idea. I never thought of including that in my spreadsheets, but now I will. Thanks for the suggestion!

 

[photoguy]

I think this is why I like the FIDO RIP calculator. It folds taxes into the calculations knowing what kind of accounts you're drawing from, what state your in, etc. You can then look at the detailed spreadsheet of costs, assets, taxes, minimum withdrawals and get a feel for the reasonableness of it all.

How accurate is the FIDO RIP calculator? If I were to model taxes in depth, I'd be tempted to go all the way and use a full version of turbotax.

 

[Theseus]

My spreadsheet projections include a mini tax return that computes taxable income and federal and state taxes so my taxes are in my expenses for planning purposes.

Same way I've been doing my calculations. Taxes are a product of how much money comes from where. And that is determined by how much moola I need to support the lifestyle we wish to maintain. Current spreadsheet choices are: Austerity (what we can get by on if everything goes to crap), Reduced (if things look like they might go to crap), Viable (just being a bit more frugal), NoChange (this is The Plan, and as the name implies will cover estimated expenses with minimal impact on our lifestyle), or Increased (if a sum of money dropped into our laps, or if we know when and where the asteroid will fall). Tax liability is then calculated after income related HI costs are estimated, allowing for the burn rate on savings to be determined. So taxes are treated as an expense, but it is one that is dependent on the sum of all other expenses, income sources, and of course, the fluid nature of tax policy.

 

[RunningBum]

I have a question for the folks who treat taxes as a liability instead of an expense. Suppose you own $500k of individual stocks in a regular (not tax advantaged) account that pays a net dividend of 4% (of qualified dividends). For your net worth calculation, do you use the full $500k or do you use 85% of it? I know this account is different than having money in an IRA, but aren't the dividends taxed in a similar way a withdrawal from an IRA would be? And if you sold some of the stocks, wouldn't you pay taxes on the capital gains (although it would not be counted as ordinary income)? I feel like I'm missing something. Thanks.

Full $500K. More explanation in the thread you started.

 

[scrabbler1]

My spreadsheet projections include a mini tax return that computes taxable income and federal and state taxes so my taxes are in my expenses for planning purposes.

I also have a skeleton tax return which is part of my overall spreadsheet which does my annual budget and short-term projections. It is good for the more routine income types (monthly and quarterly dividends) but it is mostly guesswork for the more erratic and irregular income types (cap gain distributions). Still, it gets me close which is fine.

 

[Animorph]

Good thread. A question for Animorph - does this mean that when you calculate your net worth, you only count 85% of the value of your IRA since you expect to pay 15% taxes when you withdrawal? Makes sense, I just want to make sure I understand.

Yes, 15% taxes. Makes Roth conversions in particular look a little better from a NW perspective.

 

[Animorph]

I have a question for the folks who treat taxes as a liability instead of an expense. Suppose you own $500k of individual stocks in a regular (not tax advantaged) account that pays a net dividend of 4% (of qualified dividends). For your net worth calculation, do you use the full $500k or do you use 85% of it? I know this account is different than having money in an IRA, but aren't the dividends taxed in a similar way a withdrawal from an IRA would be? And if you sold some of the stocks, wouldn't you pay taxes on the capital gains (although it would not be counted as ordinary income)? I feel like I'm missing something. Thanks.

I use (15% plus state tax) of (stock sales - basis) for tax liability, with sort of an average share cost basis for everything. But with a high enough cost basis this level of accuracy for NW may be overkill.

My main goal was to at least not make it look like Roth conversions were a huge expensive drag on NW withdrawal ratio. Otherwise, you move $100k from an IRA to a Roth and pay 15k+taxes. You're suddenly $15k "poorer" and just "spent" $15k of your year's portfolio withdrawal. This way you end up removing $85k of NW value from the IRA, paying $15k in taxes from the IRA tax liability excluded from NW, and putting the $85K + $15k of formerly taxable money into the Roth. That looks much more reasonable.


Handling taxes on portfolio withdrawals can be very difficult. It's not surprising that free calculators avoid the tax details. I have a fairly detailed tax calc for my projections. Tracking stock basis is one big problem. Another is that you generally have to iterate into a solution to arrive at a specified income net of taxes, unless you use really simple marginal rates.

 

[imoldernu]

Tax deferred doesn't mean that you have to pay taxes on that amount.
For the first 9 years of our retirement, we used our taxed savings, so no state or federal taxes. On receiving SS, our withdrawal rates from tax deferred acounts were below the minimum taxable amount, as they were when we started taking RMD @ 70 1/2. So we're probably not good tax-paying citizens.

Retiring debt free certainly helped. As our needs and expenditures balance out, and the current tax laws recognize a reasonable living standard, we have unintentionally not had to pay those taxes for 24 years.

On behalf of DW and imoldernu, a sincere thanks to those of you who are helping us through our happy retirement.

BTW... unexpectedly... despite our plan to spend down our net worth during the final years, our ultra conservative IBond and FDIC insured investments have helped maintain if not increase our net worth.

Lest anyone envy this status, I'm sure DW and I would consider any reasonable offers to trade places, and put us back into the tax paying column.

 

[David1961]

I use (15% plus state tax) of (stock sales - basis) for tax liability, with sort of an average share cost basis for everything. But with a high enough cost basis this level of accuracy for NW may be overkill.

My main goal was to at least not make it look like Roth conversions were a huge expensive drag on NW withdrawal ratio. Otherwise, you move $100k from an IRA to a Roth and pay 15k+taxes. You're suddenly $15k "poorer" and just "spent" $15k of your year's portfolio withdrawal. This way you end up removing $85k of NW value from the IRA, paying $15k in taxes from the IRA tax liability excluded from NW, and putting the $85K + $15k of formerly taxable money into the Roth. That looks much more reasonable.


Handling taxes on portfolio withdrawals can be very difficult. It's not surprising that free calculators avoid the tax details. I have a fairly detailed tax calc for my projections. Tracking stock basis is one big problem. Another is that you generally have to iterate into a solution to arrive at a specified income net of taxes, unless you use really simple marginal rates.

Thanks for the explanation. I understand much better now.

 

[Huston55]

How accurate is the FIDO RIP calculator? If I were to model taxes in depth, I'd be tempted to go all the way and use a full version of turbotax.

The basis and assumptions seem reasonable to me, and I expect the math is accurate. I think a better question is, "How well do the RIP assumptions model my personal situation?" I suggest you read the 'Methodology' document to decide if it's appropriate for you.

 

[ERhoosier]

....... With the ever changing IRS, however, an accurate estimation of the tax liability will be just an educated guess, at best.....

Agreed.
But given the huge & ever increasing national debt, and politicians' inability to control future spending, it is difficult to see how tax liabilities generally will do anything but increase in the future.

 

[mickeyd]

For your net worth calculation, do you use the full $500k or do you use 85% of it?

The funny thing is that I don't believe I have ever calculated NW for any reason other than to respond to a Q here or @ Bogleheads. Tax is an expense for me.

 

[sunsnow]

+1 for comparisons.

For myself, I track taxable cost basis and calculate taxes for each year in my projections. For a simple net worth calculation I count only 85% of IRA's versus 100% of Roths and taxable.

I would think that funds in Roths are worth a bit more than taxable, since you won't have to pay taxes on earnings.

 

[amfox1]

My spreadsheet projections include a mini tax return that computes taxable income and federal and state taxes so my taxes are in my expenses for planning purposes.

However if I was doing a formal net worth calculation I would do a deferred tax liability for my tax-deferred accounts and for unrealized gains and losses on my taxable accounts.

I do a mini tax return projection for the current year and the following year (rolling over each year).

However, in my spreadsheet projection (which covers nearly 50 years), I estimate taxes at 20% of funds withdrawn from our IRAs. This will obviously get refined as time goes on, but seems to be a reasonable estimate today. Our tax rate last year was 12% (state/federal combined). BTW, we do not estimate taking money out of our IRAs for another 20 years.

 

[NW-Bound]

You people need to find a worthwhile hobby...

Says the guy who averages ~8 posts/day for 12 years straight.

I respectfully have to disagree with both of you.

While I average only 4.5 posts per day, I think that posting here is very wholesome: amortizing the subscription fee over the number of posts shows me that this hobby is very low cost, while the entertainment value is much higher than I have seen on TV and printed media such as People, the National Enquirer, etc...

 

[Koolau]

You people need to find a worthwhile hobby...

Heh, heh, apparently, yer lookin' at it.

 

[Koolau]

Lest anyone envy this status, I'm sure DW and I would consider any reasonable offers to trade places, and put us back into the tax paying column.

I suspect there are some folks still w*rking who would take you up on this offer. Win-win. They get to ER and you get to pay taxes. Wait! Forget what I said.

 

[Animorph]

I would think that funds in Roths are worth a bit more than taxable, since you won't have to pay taxes on earnings.

OK, you made me look. My projections do subtract (current value - basis value) * default capital gains rate from taxable equities when calculating net worth. Must have been bored some time in the past.

Currently my basis is about 90% of the current value, so it's only a 1.5% hit. And I'm busy spending the taxable accounts, so they won't have long to grow.