Poll: What % of net-worth do you still have to pay tax on?

[Huston55]

Our number is 51% and it was easy to calculate; did it on my phone. Our assets are @ Fido + an old 401k + real estate. Perhaps our AA is simpler than many or, perhaps some are over complicating this. In any case, I think it's a useful number when thinking about future tax planning. Of course, one has to consider what other income streams they have (SS, pensions, etc.) to see the whole picture.

 

[sengsational]

I assumed everyone did it this way.....yeah yeah never assume.

I never even thought of netting out any liabilities when calculating net worth. I assumed everyone just added-up their various account statements and maybe pulled their home value from Zillow. Add-up those few numbers and call it a day.

That's how I've been doing it.

Interesting discussion about NW calculations with and without adjusting for income taxes. The only time I adjust is calculating the number of years of spend I have....and then it's just a conservative (high) percentage presumed to go to income taxes. Interesting how you got into doing it that way (options, where it made a bid difference).

Even if you don't track it if you use Vanguard you can easily look it up. Probably other service providers too I suspect.

I am surprised that your 401k doesn't split out regular/Roth.

Concerning looking-up things, my 401k (Hewitt) is the one that's the pain. They break-down the account balance "by source", which includes six, count 'em, six buckets (Before tax, after tax, Roth 401k, rollover, and two different flavors of matching due to an old 401k getting pulled into the current 401k). They also give me account balance "by fund", where I have three funds active. So for "Fund A", there are some Roth 401k funds, before tax funds, etc, all six, but they don't give you that detail at the fund level. Technically, I have 18 "positions". That is, if you take all of the flavors (6) times the number of investment vehicles (3). But those details are nowhere to be found. I've called, and they have the details, they just don't exist on the statement or web site.

 

[CRLLS]

I never even thought of netting out any liabilities when calculating net worth. I assumed everyone just added-up their various account statements and maybe pulled their home value from Zillow. Add-up those few numbers and call it a day.

I do the same. I add up the pre-tax and after tax accounts and do the math accordingly, Since the tax liability is very complicated if you are mostly in the 15% bracket, when and how you balance the account withdrawals, determining the liability before hand is just a best guess. I know I have to pay taxes when withdrawn, and estimate them as part of my expenses. That is difficult too when trying to juggle ACA subsidy, what year I take SS, which account I take $ from etc...... So net worth to me is what it is worth now, not after someone (the IRS) takes a bite from it.

I do keep track of what my taxable or non-taxable assets are. Not including our home, we are 86% taxable. If I include our home in net worth and its net value as cash assets, it is 77% taxable. Like some others, I'm not sure what relevance the data has as everyone's situation is different.

 

[Danmar]

Yes, if you always pay at the same marginal rate, then it does not matter. As for me, "income averaging" is important because I am straddling the tax brackets.

But it is true that one has to allow for Uncle Sam's cut in the budget one way or the other (maybe Aunt Samantha in the frozen north?).

I guess if you plan on leaving it as a legacy and your assets on demise are under the $5.45 million exemption , your heirs would get a step up and no tax owing? But I'm not that familiar with your estate tax regime.

In Canada the second to die will owe cap gains tax, no exceptions. We generally don't make up personal names for institutions.

 

[RunningBum]

Taxes are complicated and hard to predict whether you account them before hand or later. If you're only looking at your tax liability at the start of year, you aren't really doing a complete long term budget. Many can get away with this if taxes are pretty even no matter what you do, but if they aren't, you may run into surprises. I feel like I'm at least making an attempt to estimate future tax liabilities my way, rather than just hoping for the best.


Just for example, at least some people here must be living primarily off money in taxable accounts, getting mostly dividends and maybe selling some investments, with small capital gains. They may be able to keep all of this at 0% tax due to being in the 15% bracket. But once they start getting a pension, SS, and tapping IRAs as the taxable account runs down, this is all regular income taxed mostly at 15%. Suddenly the tax part of their budget is likely to go way up.

 

[pixelville]

Just for example, at least some people here must be living primarily off money in taxable accounts, getting mostly dividends and maybe selling some investments, with small capital gains. They may be able to keep all of this at 0% tax due to being in the 15% bracket. But once they start getting a pension, SS, and tapping IRAs as the taxable account runs down, this is all regular income taxed mostly at 15%. Suddenly the tax part of their budget is likely to go way up.

That was the primary reason for this poll. To have us all aware of where we are in this. Specially if you look at the second calculation in the OP, it will make you somewhat more aware of how to plan/even out your taxes in the years to come.
Going forward I am going to be tracking this % as part of my net worth spreadsheet. It is easy enough since all brokers show the unrealized gain/loss on the portfolio and the IRA/Roth/Bank, etc is already tracked.

 

[audreyh1]

Taxes are complicated and hard to predict whether you account them before hand or later. If you're only looking at your tax liability at the start of year, you aren't really doing a complete long term budget. Many can get away with this if taxes are pretty even no matter what you do, but if they aren't, you may run into surprises. I feel like I'm at least making an attempt to estimate future tax liabilities my way, rather than just hoping for the best.


Just for example, at least some people here must be living primarily off money in taxable accounts, getting mostly dividends and maybe selling some investments, with small capital gains. They may be able to keep all of this at 0% tax due to being in the 15% bracket. But once they start getting a pension, SS, and tapping IRAs as the taxable account runs down, this is all regular income taxed mostly at 15%. Suddenly the tax part of their budget is likely to go way up.

Or, they just figure a bunch of the new income will go to taxes.

I guess in my case (tax deferred <10%) I don't expect the taxable accounts to run down. So with SS and RMDs coming online, I expect those additions to our income to be paying the new taxes as well as Medicare in the case of SS, so we don't see nearly as much from that additional income.

 

[pixelville]

Also interesting that it was requested as percentage of net worth, instead of just investments.

Living in the Bay Area, you realize that for quite a few people their entire net worth is in their home. And their retirement plan is to sell the house at some point and move to a lower COL area. Then there are others who are lifelong renters. Hence to account for such differences it was asked as a percentage of net worth.

 

[gcgang]

About 20% unrealized gains, 10% IRRA.

 

[Danmar]

Just for example, at least some people here must be living primarily off money in taxable accounts, getting mostly dividends and maybe selling some investments, with small capital gains. They may be able to keep all of this at 0% tax due to being in the 15% bracket. But once they start getting a pension, SS, and tapping IRAs as the taxable account runs down, this is all regular income taxed mostly at 15%. Suddenly the tax part of their budget is likely to go way up.

Agree. But, I suspect most people simply treat their added tax as an increase to expenses. On the other hand, I treat all divs and any dispositions net of tax, that is, tax is an offset to income. Works for me.

 

[mpeirce]

That's how I've been doing it. It started when I had stock options that would throw me in the top tax bracket when I had to exercise them. I would be taxed nearly half the value, so it didn't make sense for me to think I had, for example, $2M when I really would barely come away with $1M after taxes. The option money was all tagged for retirement accumulation, so it wasn't part of my budget then, and I'd be forced to exercise them before retirement so using post-tax value to see if I had enough to retire made the most sense by far.

Once I set up my spreadsheet this way I realized my 401K/IRA would eventually be taxed as well, so I reduced those as well, and the cap gains followed. It just made sense to me to treat all my funds the same way, using post-tax value.

The stock options are long gone but I kept the system.

This is exactly how I came to have a similar viewpoint. The amount of taxes we paid when I cashed in stock options was staggering - if someone "forgot" about the taxes owed on those they'd be in for a big unpleasant surprise.

After years of viewing our assets that why I don't see any reason to stop. The taxes we owe on existing capital gains and tIRAs is well into the mid-six figures, so it's helpful (for us) to be well aware of it.

If we both get hit by a bus tomorrow and the kids get it all - with an updated cost basis - well, good for them. It's still not something I'm planning for...

 

[NW-Bound]

I guess if you plan on leaving it as a legacy and your assets on demise are under the $5.45 million exemption , your heirs would get a step up and no tax owing? But I'm not that familiar with your estate tax regime.

In Canada the second to die will owe cap gains tax, no exceptions. We generally don't make up personal names for institutions.

The step-up in basis applies only to after-tax assets. If we have any before-tax retirement funds left to my children, these will be taxed.

Agree. But, I suspect most people simply treat their added tax as an increase to expenses...

Same here. But I still need to know how much that increase is.

Anyway, the concern over tax is mainly to see how much spending power I have, rather than that of my heirs. I am not that rich.

 

[Danmar]

The step-up in basis applies only to after-tax assets. If we have any before-tax retirement funds left to my children, these will be taxed.

What about imbedded cap gains in a taxable account. I thought these escaped taxation?

 

[audreyh1]

What about imbedded cap gains in a taxable account. I thought these escaped taxation?

Yes they do. Heirs get stepped up basis.

Well - there is a Federal estate tax on estates with a >$5M exemption, but other than that.

 

[Danmar]

Yes they do. Heirs get stepped up basis.

Well - there is a Federal estate tax on estates with a >$5M exemption, but other than that.

Thanks. This is a very big benefit for heirs. In Canada, on death, there is a deemed disposition of capital property and cap gains tax would be owing. No estate or gift tax though. Gets a little complicated for Canadians owning assets in the US(vis a vis estate taxes).

 

[PhrugalPhan]

Very interesting question. My goal has been to hit retirement with my retirement accounts at 50% taxable. Its unlikely (I would need to overcome a current $180k difference in 6 years), but seeing that my net wealth has less than 50% to be taxed right now is great (I estimated only 45% of my net worth is taxable).

 

[NW-Bound]

I do not know about the tax system in Canada, but in the US dividends and capital gains have been given preferential treatments in recent years.

Let's take two extreme cases where married couple A gets $100K/yr from their 401k/IRA, and couple B gets the same from long-term capital gains and/or dividends from their after-tax savings.

Couple A: $100K income, $11,438 Federal tax
Couple B: $100K income, $675 Federal tax

The difference is $10,763. Take this up to $150K, and the difference widens to $15,763.

Couple A: $150K income, $23,938 Federal tax
Couple B: $150K income, $8,175 Federal tax

The above numbers are accurate for 2015, and do not include state taxes. So, one can see that the tax bites are significant, and differ depending on where your money is.

So, obviously it is better in retirement to have more of your stash in after-tax accounts. Sadly, this is less and less true for me, as I have been spending my after-tax money while waiting to the age of 59-1/2 to tap my IRA/401k.

PS. Note that dividends were taxed as ordinary income prior to 2003. Will we revert to that? Who knows?

 

[RobbieB]

This poll is the flattest "curve" I've ever seen. Straight line.

 

[NW-Bound]

I asked for the same info in a poll almost 4 years ago, and the distribution was also relatively flat.

See: http://www.early-retirement.org/forums/f28/percentage-of-taxable-money-in-portfolio-64714.html.

 

[Alan]

I asked for the same info in a poll almost 4 years ago, and the distribution was also relatively flat.

See: http://www.early-retirement.org/forums/f28/percentage-of-taxable-money-in-portfolio-64714.html.

Thanks for the reminder. I answered 60-70% back then. Now at 24% so good progress, and we've still got 8 years to do conversions before RMDs.

 

[RunningBum]

I asked for the same info in a poll almost 4 years ago, and the distribution was also relatively flat.

See: http://www.early-retirement.org/forums/f28/percentage-of-taxable-money-in-portfolio-64714.html.

Funny, the biggest outlier so far, 10-20% only having 3% (3/100) votes as I post this, was tied for the top at over 15% (25/158) last time. The rest are a lot closer and the distribution in both is pretty flat.