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Tax deferred accounts as part of NW
Old 03-17-2017, 08:06 AM   #1
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Tax deferred accounts as part of NW

Wondering how others treat their tax deferred accounts when calculating their net worth. I think most people would use the entire amount of 401k or trad ira in the NW. But, we know 100% of those funds aren't going to be realized. I've always taken a percentage and added to the liability side to account for taxes when I measure NW, which is hard b/c I really don't know the tax rate I'll have when the funds are pulled out. I know it doesn't REALLY change anything either way...just curious.
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Old 03-17-2017, 08:23 AM   #2
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current assets minus current liabilities = NW

key word is current, because one cannot predict the future
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Old 03-17-2017, 08:32 AM   #3
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Originally Posted by hesperus View Post
current assets minus current liabilities = NW

key word is current, because one cannot predict the future

That's right - in fact, other than a Roth IRA and the cash under your mattress, virtually everything will come with some sort of incurred cost (cap gain taxes, realtor fees, trading fees, etc).
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Old 03-17-2017, 08:35 AM   #4
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I always count the full amount. NW is a number just for fun and not used for any practical purpose.
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Old 03-17-2017, 08:43 AM   #5
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I always count the full amount. NW is a number just for fun and not used for any practical purpose.
+1

In calculating NW, discounting tax deferred funds for future taxes is just as pie in the sky as discounting for unrealized capital gains on after tax investments and estimating the realized cash value on your house(s).
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Old 03-17-2017, 08:50 AM   #6
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FireCalc --and other calculator--results include taxable SWR so I use the tax deferred as the full NW amount. Out of the SWR come taxes as well as spending.
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Old 03-17-2017, 08:55 AM   #7
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Like most folks, I use the total number.
After all .. if I'm going to discount the tax payable, then what about the stock drop to 50% of value that could come next week.... ?
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Old 03-17-2017, 08:55 AM   #8
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+1

In calculating NW, discounting tax deferred funds for future taxes is just as pie in the sky as discounting for unrealized capital gains on after tax investments and estimating the realized cash value on your house(s).
+1

Exactly my take on it. When you hear that someone like Bill Gates has a net worth of $85 billion, that is simply his total equity stake in Microsoft and other publicly known investments. Certainly he would have to pay somewhere in the neighborhood of 25% in capital gains tax on that entire amount were he to liquidate it. (The top marginal tax rate on CG in the state of Washington is 25%.)
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Old 03-17-2017, 08:58 AM   #9
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I don't take my networth seriously, it varies from month to month. I won't bother calculating anything.
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Old 03-17-2017, 09:08 AM   #10
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I do my net worth in my head and round it off. Don't try to estimate tax costs of realization. Not really useful for anything other than to make me feel good when the markets are up. Also, to help remind me how lucky I am. Never discuss/disclose this number to anyone, even Dspouse. What would be the point?
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Old 03-17-2017, 09:18 AM   #11
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I discount traditional IRA accounts' value knowing today's Fed & state tax rates we pay on marginal income & projecting where I best judge those will be in the future. I'd rather undervalue assets than over value them. Our tIRA's w/o this adjustment are close to 40% of our assets.

I know with near-certainty the rates won't be zero. I was using 12% till the higher rates kicked in during the Obama Admin & then I upped it to 15%. Those that might inherit any of this can use their own judgment.
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Old 03-17-2017, 10:56 AM   #12
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I don't bother to provide for deferred income taxes in Quicken... which I use to track our net worth.... even though as a retired CPA I know if I was preparing personal financial statements (say for a creditor) that I should.

Technically, it would not be only tax deferred accounts, but also on unrealized gains and losses on taxable accounts, properties marked up to fair value, etc. The cost/effort/benefit isn't worth the bother to me.

And then there is that pesky issue of what tax rate to use.
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Old 03-17-2017, 11:01 AM   #13
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I don't bother to provide for deferred income taxes in Quicken... which I use to track our net worth.... even though as a retired CPA I know if I was preparing personal financial statements (say for a creditor) that I should.

Technically, it would not be only tax deferred accounts, but also on unrealized gains and losses on taxable accounts, properties marked up to fair value, etc. The cost/effort/benefit isn't worth the bother to me.

And then there is that pesky issue of what tax rate to use.
+1. Well put. What he said
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Old 03-17-2017, 11:23 AM   #14
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NW is a number just for fun and not used for any practical purpose.
+2

I can't think of any use I could have for it.
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Old 03-17-2017, 11:28 AM   #15
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I just look at our net worth as a whole (quicken displays running totals...).

OTOH, when projecting retirement spending, I include the taxes for converting/withdrawing IRAs to the top of the 28% bracket.
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Old 03-17-2017, 12:42 PM   #16
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Originally Posted by hesperus View Post
current assets minus current liabilities = NW

key word is current, because one cannot predict the future
Not to get too down into the accounting weeds, but the correct statement is:

Assets minus liabilities = new worth

Essentially, all assets minus all liabilities. So theoretically you would include an estimate of tax liabilities.

But of course, it is only an estimate.

As long as you include an estimate of taxes in your budgets based on the source of funds, i am not sure it is necessary to agonize over the amount and rate unless you are reporting this to a bank or other authority.
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Old 03-17-2017, 01:00 PM   #17
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How are Estate taxes calculated?

e.g. The spouse of a married dies and has the following assets, beneficiaries set up on all accounts and will in place.

House net value after sale $1m
Tax deferred IRAs $2m
Roth IRAs $1m
After tax investments $2m

Are Estate taxes calculated on the full $6m (less the tax free allowance of $5.4m)?
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Old 03-17-2017, 01:25 PM   #18
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Originally Posted by pb4uski View Post

Technically, it would not be only tax deferred accounts, but also on unrealized gains and losses on taxable accounts, properties marked up to fair value, etc. The cost/effort/benefit isn't worth the bother to me.

And then there is that pesky issue of what tax rate to use.
I do this too. Some tax rate is better/closer than zero for me.
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Old 03-17-2017, 01:28 PM   #19
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As long as you include an estimate of taxes in your budgets based on the source of funds, i am not sure it is necessary to agonize over the amount and rate unless you are reporting this to a bank or other authority.
There's no agony in making a best estimate that you believe is closer than a zero estimate. I change it every few years as conditions change. NBD.
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Old 03-17-2017, 01:35 PM   #20
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I do my net worth in my head and round it off. Don't try to estimate tax costs of realization. Not really useful for anything other than to make me feel good when the markets are up. Also, to help remind me how lucky I am. Never discuss/disclose this number to anyone, even Dspouse. What would be the point?
My net worth is my spouse's net worth also, so I do discuss with her periodically.

Frankly, calculating/knowing NW fairly close - it will never be perfect - is how I budget and consider how our investments are doing. If it's going up, we're not spending too much. If it's going down, need to consider if we need to cut back. By that, if it's dropping less than the market & it doesn't project to our running out, I still don't worry.
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