Tax deferred accounts as part of NW

[audreyh1]

You might be thinking of the UK where the spouse "inherits" the additional exemption amount of the other when they die.

Well, you can get it to work that way too in the US.

The "deceased spouse unused exclusion amount" can be carried over to the surviving spouse's estate.

Is portability automatic? No. The executor handling the estate of the spouse who died will need to transfer the unused exemption to the survivor, who can then use it to make lifetime gifts or pass assets through his or her estate.

https://www.forbes.com/sites/debora...ouples-guide-to-estate-planning/#294d70d52d82

So the 2017 estate tax exemption can be $10.98M per couple, as long as the executor does things right.

 

[GrayHare]

You might be thinking of the UK where the spouse "inherits" the additional exemption amount of the other when they die.

Since 2013's American Taxpayer Relief Act in the US there has been exemption portability, which is very similar, however the benefit of cost basis step-up would go away if estate tax is repealed.

 

[Alan]

Well, you can get it to work that way too in the US.

The "deceased spouse unused exclusion amount" can be carried over to the surviving spouse's estate.
https://www.forbes.com/sites/debora...ouples-guide-to-estate-planning/#294d70d52d82

So the 2017 estate tax exemption can be $10.98M per couple, as long as the executor does things right.

Since 2013's American Taxpayer Relief Act in the US there has been exemption portability, which is very similar, however the benefit of cost basis step-up would go away if estate tax is repealed.

Cool, thanks for the info.

 

[pjigar]

I used to 'adjust' after tax/cost worth of every asset when calculating my networth early on. In realized that, it is lot of extra work so I started taking current prices without worrying about tax/cost. The networth tracking is just for fun so constant error is OK.

 

[bingybear]

I see trying to estimate after tax value for IRA and investments pretty much a crap shoot as it depends on how and when I do roth conversion, how much harvested capital losses I have to offset gains and how much capital gains harvesting I can do. Trying to predict effective tax rates for transactions over the next 20, 30 or more years is kind of a wild guess. If I estimated based on a couple years to convert... then I'd likely be pessimistic.

So... I just sum the totals. I usually just use investable assets and ignore others.

 

[RunningBum]

I see trying to estimate after tax value for IRA and investments pretty much a crap shoot as it depends on how and when I do roth conversion, how much harvested capital losses I have to offset gains and how much capital gains harvesting I can do. Trying to predict effective tax rates for transactions over the next 20, 30 or more years is kind of a wild guess. If I estimated based on a couple years to convert... then I'd likely be pessimistic.

So... I just sum the totals. I usually just use investable assets and ignore others.

So how do you estimate your retirement expenses when you are apparently unable to make an estimate on income taxes?

 

[youbet]

So how do you estimate your retirement expenses when you are apparently unable to make an estimate on income taxes?

Yep.

With RMD's kicking in, our retirement tax rate (effective, not marginal; fed + state) is sliding up into the 20% range. Planning spending without considering the impact of writing those checks would be capricious.

Generally, the details of how one calculates NW depends on what you're planning to use the answer for. There's no doubt that folks in medium or high tax brackets who have significant deferred savings need to consider the impact of taxes for some calculations.

 

[Fedup]

You might be thinking of the UK where the spouse "inherits" the additional exemption amount of the other when they die.

No it's US, UK has much lower limit per person.
See the link below, it's $10.90 million for a couple. This has been my understanding for a while. Not something new.

Estate Taxation | ElderLawAnswers

 

[bingybear]

So how do you estimate your retirement expenses when you are apparently unable to make an estimate on income taxes?

estimate your retirement expenses-- took my 2013 expenses, added 10k for health insurance, added 10k for out of pocket health expenses. I used that as a baseline. Ran simulations to 95, 105 and 115 years old. Bumped up the spending until I was on the edge of failures. Figured I now had some estimates of the margin of my baseline spending plan.

I can estimate the taxes, but it really depends the distribution level that I use. This years roth conversion cost 6% in federal tax. I figure that by the time we have RMDs the TIRAs will be reduced enough to still be in a modest tax bracket. But I expect SS will be taxed assuming no law changes.

 

[YVRRocketSurgery]

I include the full amount of my tax deferred accounts to calculate net worth. But like others have mentioned, on the surface, net worth is kind of just a pulse check number for me.

From there, the key for me is how I'm taking components of my net worth and converting it after tax cash flow. Tax rates are obviously subject to change but I run my numbers through a tax calculator with this year's rates and how much I expect to draw from each bucket to get get an estimate of what my cash flow is going to look like.

 

[RunningBum]

The "quick look" is all the more reason to reduce by the future tax liability, IMO.


If I convert $100K of my tIRA to a Roth, and pay 20% in fed+state taxes on the conversion, I suddenly have $20K less in total investments, even though my financial situation really didn't change. I'd rather than I always counted that as $80K so that my overall number doesn't change just because of conversion from one account to another.

 

[bingybear]

The "quick look" is all the more reason to reduce by the future tax liability, IMO.


If I convert $100K of my tIRA to a Roth, and pay 20% in fed+state taxes on the conversion, I suddenly have $20K less in total investments, even though my financial situation really didn't change. I'd rather than I always counted that as $80K so that my overall number doesn't change just because of conversion from one account to another.

I agree. I converted 61k last year with effective fed tax at 6%. I did not rework the state tax to see what the state effective tax rate was on the conversion. I pay the tax on the conversion with after tax $. For me this was close to the top of the 15% bracket.

I just can't really see planing this all out over the next 20 to 50 years.

 

[Taxman59]

Interesting thought, but what tax rate?
Right now, I am in the 0% tax rate, except for the additional premiums for the ACA. If I take very much from the IRA (or convert too much) then I am in the marginal 15%. When I take RMDs, i expect to be in the 15-25% tax bracket if the markets are up, the 0% to 15% if they are level or lower and I have been good on the ROTH conversions.
So I ask again what rate should we use?

BTW, the above assumes that we get no changes in the tax rates for the next 13 years!!

 

[RunningBum]

Interesting thought, but what tax rate?
Right now, I am in the 0% tax rate, except for the additional premiums for the ACA. If I take very much from the IRA (or convert too much) then I am in the marginal 15%. When I take RMDs, i expect to be in the 15-25% tax bracket if the markets are up, the 0% to 15% if they are level or lower and I have been good on the ROTH conversions.
So I ask again what rate should we use?

BTW, the above assumes that we get no changes in the tax rates for the next 13 years!!

A good question, but as I tried to say before, irrelevant to the decision of where to account for taxes. If you don't take taxes off your net worth, you have to include them in your future expenses estimate, so either way you have to make your best estimate of the tax rate you'll pay.

Personally I use 15% for federal and 6% for state, even though some of it will be taxed at 0 or 10% federal. It's a nice buffer, though I'm thinking about changing it to closer to the real tax rate I tend to pay, to give me a more accurate picture.

 

[timemoveson]

Full value used

I treat our assets as a perpetual base, so I use full, pre-tax dollar estimates for all assets. I'm producing incomes from all of the assets and not intending to ever draw them down.

The incomes (REIT returns, dividends, bond fund yields, etc.) come out of the accounts on their own schedule and are taxed at the appropriate level of the day. I have an accurate estimate of the after-tax income the total asset base is producing so I know the tax situation very closely.

When assets have to be sold or are chosen for sale (for good reasons hopefully), the capital gains will be handled the same way.

 

[pb4uski]

I've converted over $200k over the last few years (to the top of the 15% tax bracket) and paid about 7.3% on average.

Before Roth conversions our taxes would be zero... no ACA subsidy in our case. So some is tax free since it is covered by deductions and exemptions, some is at 10%, and in some years some may be at 15%. We've paid as little as 2% and as much as 9.7%.

If I were to calculate deferred taxes then I would probably use 10% since there is no way we will convert all our tIRAs before SS starts and we are in a higher tax bracket.

The other interesting question is if were are in a higher tax bracket when SS starts, does the higher tax rate apply to SS (for which we do not reflect as an asset therefore no deferred taxes) or to our tIRA.... which came first, the chicken or the egg?.... a rabbit hole I don't care to go down now that I am retired and have much better things to do.

 

[bingybear]

A good question, but as I tried to say before, irrelevant to the decision of where to account for taxes. If you don't take taxes off your net worth, you have to include them in your future expenses estimate, so either way you have to make your best estimate of the tax rate you'll pay.

Personally I use 15% for federal and 6% for state, even though some of it will be taxed at 0 or 10% federal. It's a nice buffer, though I'm thinking about changing it to closer to the real tax rate I tend to pay, to give me a more accurate picture.

When I run RIP I use 20% fed and 5% state. Since RE that has grossly over estimated taxes. I also ignore some of my assets sometimes.

When I calculate NW, I usually just sum all or most or all our investable assets and ignore embedded taxes.

When dealing with investments I place them in the accounts most suitable for the tax characteristics of the investments. I will harvest CG or CL as appropriate at the time. Try to realize taxable events when the tax is more modest.

 

[bingybear]

I've converted over $200k over the last few years (to the top of the 15% tax bracket) and paid about 7.3% on average.

Before Roth conversions our taxes would be zero... no ACA subsidy in our case. So some is tax free since it is covered by deductions and exemptions, some is at 10%, and in some years some may be at 15%. We've paid as little as 2% and as much as 9.7%.

If I were to calculate deferred taxes then I would probably use 10% since there is no way we will convert all our tIRAs before SS starts and we are in a higher tax bracket.

The other interesting question is if were are in a higher tax bracket when SS starts, does the higher tax rate apply to SS (for which we do not reflect as an asset therefore no deferred taxes) or to our tIRA.... which came first, the chicken or the egg?.... a rabbit hole I don't care to go down now that I am retired and have much better things to do.

Like many of these tax discussion... "how much is the last dollar taxed". So they say if I increase my income by $1, then what is the tax difference. People do this all the time especially with regards to ACA subsidies. They don't often say I have $1 of LTCG or Q-Divys ... and how much tax does that add (including ACA subsidy).

I think after the % of SS that will be taxed, the tax is at the same taxing method for both SS and RMD -- with the exception of embedded tax basis in your IRAs. So it really doesn't matter. But you knew that

 

[gerntz]

Yes, I'm aware of the issues surrounding pensions, it's just that my pension is so big that to ignore it for net worth calculations would make any calculation of net worth meaningless. And after all, net worth calculations are really only useful (once retired) for making you feel good and comparisons, so..... Also, I have elected for full survivor benefits so the pension does continue till my spouse dies. Agree about not including SS (Canadian equivalent) as this would not be material.

OK, but 1) pension streams are income, not NW imo, & 2) NW isn't useless to me as it figures into understanding what we can spend, including gifting, in the future for us.

 

[gerntz]

however the benefit of cost basis step-up would go away if estate tax is repealed.

Most likely, not for certain imo. But if your scenario is the case, most are better off with the estate tax.

 

[gerntz]

Yep.

With RMD's kicking in, our retirement tax rate (effective, not marginal; fed + state) is sliding up into the 20% range. Planning spending without considering the impact of writing those checks would be capricious.

Generally, the details of how one calculates NW depends on what you're planning to use the answer for. There's no doubt that folks in medium or high tax brackets who have significant deferred savings need to consider the impact of taxes for some calculations.

Agree.

 

[gerntz]

Interesting thought, but what tax rate?

BTW, the above assumes that we get no changes in the tax rates for the next 13 years!!

Since RMD's will happen & our income will be near-constant till then, including current IRA withdrawals, I guesstimate to the overall rate we'll be paying then. Now we pay and effective rate of 7-9% of MAGI depending on year, but expect that to move to near 15% since we get pushed up a bracket on marginal income. Need more M in MAGI!!

I can't anticipate how tax rates might change.

 

[eastnortheast]

Yes we always include the NPV of pension to make our projections. We also exclude real estate.

Kind of what I do. Actually keep two different Net Worth values - one total NW and one retirement "NW". Both include the NPV of my projected pension, but the retirement "NW" excludes house value, college savings, HSA accounts, etc.

Track Net Worth, but dont use that in and of itself for anything.

 

[RunningBum]

One more point to make since I'm beating this into the ground anyway. I use a % of my NW as my target for expenses for the year. If I include all income taxes as an expense, that can vary quite a bit depending upon how much Roth conversion I do, and whether I liquidate some assets that yield a capital gain, or if I don't have to sell anything that year or take a capital loss. I don't want to manage my other expenses differently based on what I do with Roth conversions and cap gains.


Instead, I separate out the income taxes due to those events, and don't count them against my yearly expenses, and my % of NW is based on after tax value of my portfolio.


Practically speaking, I try to smooth out my income over the years, but things like taking the ACA subsidy while it's available, and perhaps not if the income limit is repealed does make for some variability.


This makes the most sense to me for my situation. It may not be a good model for others. In strict accounting terms it may not be "correct", but I answer to no one else (except the IRS) and I don't see how doing it my way would give me incorrect numbers that the other way wouldn't.

 

[pb4uski]

Since 2013's American Taxpayer Relief Act in the US there has been exemption portability, which is very similar, however the benefit of cost basis step-up would go away if estate tax is repealed.

Maybe, but not necessarily. Step-up applies today in cases where then exemption exceeds the estate so there is no estate tax, which is the majority of estates so it isn't a slam dunk that step-up would go away if the estate tax is repealed.

If step-up did go away, it might be a great, pretty-much under-the-radar way to raise revenue!