Do you calculate taxes due in your net worth?

[Whisper66]

Future capital gains and dividend payments are in no way similar to 401K/tIRA income you've deferred taxes on. If you want to handle the tax on the deferred income as an expense when you incur it, that's perfectly fine, but to compare it to possible gains that may never come is absurd.

Of course they are different. Absurd to handle the way I (and many others do)? No. BTW - who knows how the tax laws will be when we finally distribute gains / dividends. One could argue it's absurd to include our WAG on those as well. But no matter....I've just answered the OP's question about how I personally handle NW calc. You do it however you want, makes no difference to me.

 

[Miranda]

I estimate taxes as if I'll liquidate assets over time rather than dump the whole tIRA at once with much of it taxed in a higher bracket. Chances are good I won't liquidate all of my estate before I go, but I'm not concerned with figuring the dollar amount I'll leave to my heirs. It's well under the current estate limit unless that changes.

I am probably misunderstanding your point, and I apologize. But my understanding is that non-spousal inherited tIRA's are not subject to estate tax (or exempted from it if less than ~5M). They are subject to income tax and the non-spouse beneficiary must start taking RMD's within the year (or the year after?) inheriting the account. Or they must withdraw all funds within 5 years. That is my rudimentary understanding of how inherited tIRA's will be administered.

Under the most optimistic projections of the fidelity RIP tool, there may be significant funds in our tIRA in 30-35 years (God willing). This amount is not exempt from or subject to estate tax. If the beneficiary is expected to withdraw all funds over 5 year period, presumably he/she will pay a high tax rate on those withdrawals.

So I know this is more concerned with future tax on assets after death, which I don't think is exactly what OP was talking about, but it is something that weighs on me when I think about our assets/legacy.

I hope I misunderstand this, and look forward to be corrected. This is an area where DH and I need to educate ourselves regarding a good tax-efficient strategy at this point.

ETA: It looks like tIRA in a large enough estate maybe subject to estate taxes, and also income tax? I guess there are worse problems to have, but still...

 

[jkern]

NW is just a number for fun, it has no practical valve for me. That's not the number I would use to determine my net estate to heirs, nor is it the number I use to calculate SWR.

 

[RunningBum]

Of course they are different. Absurd to handle the way I (and many others do)? No. BTW - who knows how the tax laws will be when we finally distribute gains / dividends. One could argue it's absurd to include our WAG on those as well. But no matter....I've just answered the OP's question about how I personally handle NW calc. You do it however you want, makes no difference to me.

If you read my post I said:

If you want to handle the tax on the deferred income as an expense when you incur it, that's perfectly fine

so I clearly wasn't calling handling taxes as an expense as they come due absurd.

What I called absurd was the notion that unknown future income is similar (your word) to deferred income.

And BTW as I've already said, future tax rates are a WAG whether you subtract the tax liability from your "net worth" or include it in your future budgets.

 

[RunningBum]

I am probably misunderstanding your point, and I apologize. But my understanding is that non-spousal inherited tIRA's are not subject to estate tax (or exempted from it if less than ~5M). They are subject to income tax and the non-spouse beneficiary must start taking RMD's within the year (or the year after?) inheriting the account. Or they must withdraw all funds within 5 years. That is my rudimentary understanding of how inherited tIRA's will be administered.

Under the most optimistic projections of the fidelity RIP tool, there may be significant funds in our tIRA in 30-35 years (God willing). This amount is not exempt from or subject to estate tax. If the beneficiary is expected to withdraw all funds over 5 year period, presumably he/she will pay a high tax rate on those withdrawals.

So I know this is more concerned with future tax on assets after death, which I don't think is exactly what OP was talking about, but it is something that weighs on me when I think about our assets/legacy.

I hope I misunderstand this, and look forward to be corrected. This is an area where DH and I need to educate ourselves regarding a good tax-efficient strategy at this point.

ETA: It looks like tIRA in a large enough estate maybe subject to estate taxes, and also income tax? I guess there are worse problems to have, but still...

I wasn't necessarily talking about leaving a tIRA, and since I don't think my estate will be large enough to be taxed, I'm not too educated on your question. I do know that heirs have to start taking RMDs but don't recall the details. Might be worth a new thread to get your question answered since I don't think it was part of the OP's point. Many have probably tuned out of this thread (like I probably should have!).

 

[Miranda]

I wasn't necessarily talking about leaving a tIRA, and since I don't think my estate will be large enough to be taxed, I'm not too educated on your question. I do know that heirs have to start taking RMDs but don't recall the details. Might be worth a new thread to get your question answered since I don't think it was part of the OP's point. Many have probably tuned out of this thread (like I probably should have!).

I forget what my point was, except I thought I might be veering off topic, and conflating NW and retirement planning with estate planning.

I think I am a better lurker than poster, so back into the woodwork I go...

 

[evilanne]

. . .my understanding is that non-spousal inherited tIRA's are not subject to estate tax (or exempted from it if less than ~5M). They are subject to income tax and the non-spouse beneficiary must start taking RMD's within the year (or the year after?) inheriting the account. Or they must withdraw all funds within 5 years. That is my rudimentary understanding of how inherited tIRA's will be administered.
. . .
If the beneficiary is expected to withdraw all funds over 5 year period, presumably he/she will pay a high tax rate on those withdrawals.

Rules are outline in IRS Pub 590-B https://www.irs.gov/pub/irs-pdf/p590b.pdf see Pages 5-10
--Beneficiary has option to take deceased's RMD in year of death if they were taking RMDs but RMDs must take begin in year after death unless they choose the 5 year option, which may be used if decedent died prior to taking any RMDs
--Beneficiaries of a deceased beneficiary do not calculate required minimum distributions using their own life expectancies, but continue to take RMD based on deceased beneficiary’s distribution schedule previously established based on their life expectancy.
--Distribution are taxed as ordinary income
--Roth IRA is generally distributed by the end of the fifth calendar year after the year of the owner's death unless it is payable to designated beneficiary based on life expectancy of designated beneficiary. Not subject to income tax.

 

[Montecfo]

Two investors have assets exceeding liabilities (other than income taxes) by $1M. One has his $1M in taxed accounts, all CD's. The other has hers entirely in a traditional IRA.

It is just illogical to contend that both have the same net worth, $1M.

Having said that, what is most important is that taxes are considered in some way in the budget, since they will be paid. They do not have to be considered as part of net worth, IMHO.

 

[audreyh1]

I don't worry about accounting for taxes in my net worth because they are handled after withdrawal. I have rough estimates for taxes based on long term averages after withdrawal and this gives me a ballpark of my after tax income.

Most of our assets are in taxable accounts and generate highly variable taxable income every year. < 15% are in tax deferred and we don't plan to tap them until we get to 70. Yep - probably take a 25% haircut on those.

 

[Cobra9777]

Two investors have assets exceeding liabilities (other than income taxes) by $1M. One has his $1M in taxed accounts, all CD's. The other has hers entirely in a traditional IRA.

It is just illogical to contend that both have the same net worth, $1M.

Having said that, what is most important is that taxes are considered in some way in the budget, since they will be paid. They do not have to be considered as part of net worth, IMHO.

I agree, but also consider these two retirees:

1. No investments, but has pension with COLA and SS income of $100K/yr. NW=$0.

2. No pension or SS, but has $1M investments from which he draws $40K/yr. NW=$1M

Retiree #2 has higher NW, but less than half the spending capacity of retiree #1. Seems to me, this is a much bigger issue with NW comparability than taxes on tax-deferred accounts. In this case, it's a very poor comparative indicator of the real economic position of the 2 retirees. Sure, if they both converted their assets to cash, #2 wins. But who does that?

NW is fine as a long-term wealth-tracking metric. It's more complete than tracking investments alone, especially for people with debt, rental properties, or other significant non-financial assets. But as a tracking metric, I think relevancy, simplicity, and consistency across time are more important than the finer points of asset measurement. And direction is more important than absolute value.

So... make up whatever NW rules are relevant for your situation, keep it simple, measure it consistently across time, and don't worry about comparing to other people or external benchmarks because it would be quite rare that you are actually comparing apples to apples.

 

[2017ish]

Two investors have assets exceeding liabilities (other than income taxes) by $1M. One has his $1M in taxed accounts, all CD's. The other has hers entirely in a traditional IRA.

It is just illogical to contend that both have the same net worth, $1M.

Having said that, what is most important is that taxes are considered in some way in the budget, since they will be paid. They do not have to be considered as part of net worth, IMHO.

Reminiscent of a nice signature line (from Celia) at Bogleheads: A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

 

[Koolau]

<SNIP>

If I convert money from a tIRA to a Roth and pay taxes on it, I haven't changed my financial situation, so I want my "net worth" number to stay the same after this transaction, or as close as I could get with tax estimating.

Some will argue about whether it's "correct" or what exactly "net worth" is, but I say do whatever makes sense to you for your purposes.

Totally my thinking on the subject. From FIRE at 58 to first RMD at 70, my goal has been to convert as much tIRA money to Roth and pay the taxes. I did manage to convert my last tIRA to Roth just in the nick of time. During this period of time, my nominal net worth has remained about the same even though I have been drawing from it for living expenses somewhat. That assures me that I have had very decent growth - especially for one with about 30% equities.

I do still have a very significant 401(k) on which I will owe taxes, so I discount that by an estimated tax of about 18% which is about what my total taxes turn out to be each year (State and Fed.) YMMV

 

[l8_apex]

Interesting, if you have that hypothecial $1m and lost a lawsuit for $1m you woud need to sell everthing and turn over the money. At tax time you would report the 401k/IRA withdrawals and the gains from the regular account. You would owe the IRS wouldnt you?

If you've lost everything, can't you then declare bankruptcy? Would you still have to pay taxes if you've done that? I have no idea.

 

[Refresher]

? Maybe but that's a different issue. The point is you appeared to have $1m the lawsuit takes everything you appear to have but in reality you never had that much due to taxes generated by the sale of the portfolio

 

[Montecfo]

I agree, but also consider these two retirees:

1. No investments, but has pension with COLA and SS income of $100K/yr. NW=$0.

2. No pension or SS, but has $1M investments from which he draws $40K/yr. NW=$1M

Retiree #2 has higher NW, but less than half the spending capacity of retiree #1. Seems to me, this is a much bigger issue with NW comparability than taxes on tax-deferred accounts. In this case, it's a very poor comparative indicator of the real economic position of the 2 retirees. Sure, if they both converted their assets to cash, #2 wins. But who does that?

NW is fine as a long-term wealth-tracking metric. It's more complete than tracking investments alone, especially for people with debt, rental properties, or other significant non-financial assets. But as a tracking metric, I think relevancy, simplicity, and consistency across time are more important than the finer points of asset measurement. And direction is more important than absolute value.

So... make up whatever NW rules are relevant for your situation, keep it simple, measure it consistently across time, and don't worry about comparing to other people or external benchmarks because it would be quite rare that you are actually comparing apples to apples.

Cobra, you make a very good point. That is why for comparability (and for thinking about NW) I think it makes sense to capitalize pensions (or, gasp, annuities) and add that value to net worth. Not hard to do, multiply annual pension times 25 (or the inverse of your favorite SWR).

But what we see are a lot of differing approaches, which does make it interesting.