Tax deferred accounts as part of NW

[hopeisnotaplan]

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.

 

[hesperus]

current assets minus current liabilities = NW

key word is current, because one cannot predict the future

 

[euro]

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).

 

[jkern]

I always count the full amount. NW is a number just for fun and not used for any practical purpose.

 

[Alan]

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).

 

[marko]

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.

 

[Sunset]

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.... ?

 

[Sojourner]

+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%.)

 

[Fedup]

I don't take my networth seriously, it varies from month to month. I won't bother calculating anything.

 

[Danmar]

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?

 

[gerntz]

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.

 

[pb4uski]

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.

 

[scrabbler1]

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

 

[W2R]

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.

 

[2017ish]

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.

 

[Montecfo]

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.

 

[Alan]

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)?

 

[gerntz]

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.

 

[gerntz]

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.

 

[gerntz]

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.

 

[Cobra9777]

I track NW using gross tax-deferred balances, just for simplicity and tracking consistency. I'm well aware that there will be a tax liability at whatever point I decide to convert those balances to spendable cash. That liability exists today and can be reasonably estimated based on current tax law and the specifics of one's withdrawal plan.

As pb4uski already commented, if I was required to prepare an official personal statement of financial position for a loan or other purposes, then yes, several adjustments would need to be made, including provision for a non-current tax liability to reduce tax-deferred balances to their net realizable value.

For retirement planning purposes, such a reduction would be an unnecessary complication IMO. I use a simple cash flow approach in all my spreadsheets. So it's more straightforward to track tax-deferred balances gross and treat the associated tax as a future cash outflow that I need to plan for... and will hopefully reduce with ongoing Roth conversions.

 

[Koolau]

Since I started FIRE with about 3/4 of my stash being tax deferred, I made estimates of my NW with a discount for estimated future tax. I did this tax "recognition exercise" because my goal was to reduce my deferred taxable percentage as much as possible through conversion to Roth IRAs. Doing so, of course, reduced nominal NW - at least until Mr. Market got a chance to (sometimes) replenish the nominal amount. Keeping track of the estimated after-tax value in my NW allowed me to more easily compare apples to apples NW as my conversions were taking place. Instead of using the 25%-on-the-last-dollar method, I used my average yearly tax bite % as my estimate. Not sure that was correct, but it was close enough for gummint work.

If for no other reason than my starting level of deferred accounts was so significant, I felt it necessary to recognize the future tax hit, but as always, YMMV.

 

[audreyh1]

I guess I don't sweat the taxable part of the net worth, since I don't base my income planning on my entire net worth, and the main income is coming from a taxable account. I still pay taxes on income generated by that account, but those taxes are already taken into account when I withdraw funds.

I just to the Quicken thing when comparing net worth from different years. Otherwise the number has no practical use to me.

 

[RunningBum]

Like the OP, I estimate a tax hit on my tax deferred assets when calculating my NW for purposes of determining my withdrawals. I've explained and justified my reasons for doing it enough times here not to rehash it again. On the topic of tax rate uncertainty, it's there whether you treat future taxes as an expense or a liability against assets.

 

[youbet]

Like the OP, I estimate a tax hit on my tax deferred assets when calculating my NW for purposes of determining my withdrawals. I've explained and justified my reasons for doing it enough times here not to rehash it again. On the topic of tax rate uncertainty, it's there whether you treat future taxes as an expense or a liability against assets.

I agree. For purposes of using FireCalc, for example, you either have to lower the asset number you input by estimated taxes or include estimated taxes on the expense line. Either way, you take your best guess at taxes.