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05-09-2017, 07:42 AM
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#61
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Thinks s/he gets paid by the post
Join Date: Apr 2012
Location: Nashville
Posts: 2,506
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Quote:
Originally Posted by 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.
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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.
__________________
OMY * 3 2ish Done 7.28.17
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05-09-2017, 08:28 AM
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#62
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 17,912
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Quote:
Originally Posted by RunningBum
<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.
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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
__________________
Ko'olau's Law -
Anything which can be used can be misused. Anything which can be misused will be.
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05-09-2017, 09:28 AM
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#63
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Recycles dryer sheets
Join Date: Oct 2015
Location: Bozeman
Posts: 194
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Quote:
Originally Posted by Refresher
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?
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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.
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05-09-2017, 12:01 PM
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#64
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Recycles dryer sheets
Join Date: Jul 2013
Posts: 129
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? 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
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05-14-2017, 08:10 AM
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#65
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2016
Location: Northern Virginia
Posts: 7,588
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Quote:
Originally Posted by Cobra9777
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.
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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.
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