Tax deferred accounts as part of NW
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scrabbler1
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When the time comes for me to withdraw from my IRA, I will estimate the income tax hit as an expense. Same is true for when I begin collecting my frozen company pension and when I take SS. I expect my overall tax hit to take into account more than one of these "reinforcements" which will arrive starting in about 5-6 years, when I turn 59.5.
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^^ This ^^
Taxes are based on the withdraw and tax law in place at the time. Tax assumptions fit with a spending model, not in the definition of NW.
If you are going to use net worth as part of optimizing your accumulation/spending/net worth then you should make a stab at including tax liabilities. No sense having your optimization tell you to keep everything in a traditional IRA instead of a Roth just because that gives you the biggest ending number.
Beyond that I don't worry about it too much and usually just add everything together in Quicken.
Beyond that I don't worry about it too much and usually just add everything together in Quicken.
Danmar
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I think a more important tool is projecting and understanding cash flow components in retirement. I spend a lot of time forecasting future dividends, expenses, and taxes. Hardly any time on net worth projections. Granted I'm retired (for 10 years) and in the draw down phase. Probably different if I was in the accumulation phase.
Closet_Gamer
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I accrue for future tax liability when calculating net worth.
I started because I have a substantial non-qualified deferrred comp plan that will be hit with ordinary income taxes when it comes out and will come out fast enough to hit the higher brackets. Very misleading to not think about that. Once I scored that for taxes, I did it to my other accounts as well. Obviously it's an estimate but I like doing it. I've not gone so far as to accrue for unrealized gains.
I've always thought of net worth in terms of it's liquidated value:
"If I converted it all into $1 bills and decided to roll around in it, high big would the pile be?"
I started because I have a substantial non-qualified deferrred comp plan that will be hit with ordinary income taxes when it comes out and will come out fast enough to hit the higher brackets. Very misleading to not think about that. Once I scored that for taxes, I did it to my other accounts as well. Obviously it's an estimate but I like doing it. I've not gone so far as to accrue for unrealized gains.
I've always thought of net worth in terms of it's liquidated value:
"If I converted it all into $1 bills and decided to roll around in it, high big would the pile be?"
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Danmar
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I started because I have a substantial non-qualified deferrred comp plan that will be hit with ordinary income taxes when it comes out and will come out fast enough to hit the higher brackets. Very misleading to not think about that. Once I scored that for taxes, I did it to my other accounts as well. Obviously it's an estimate but I like doing it. I've not gone so far as to accrue for unrealized gains.
When I was working, I did the same. Mostly to forecast what the after tax cash flows would be. Now that I am retired the only tax that needs to be paid in future is the cap gains tax on liquidation. I don't bother trying to include this, although I agree with others that it is "correct" from an accounting perspective to do so. All my accounts are taxable.
kcowan
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I would think the house would pass to the survivor without tax. If not, it can be made so by a tax accountant. I would also realize any tax deferrals before paying estate tax.
mpeirce
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I track our assets in a spreadsheet, so it's pretty easy to calculate a few alternate numbers to look at.
I don't call it net worth ;-) but I total up our financial accounts and show the number. I also have another number with a couple of special accounts subtracted out - DS's college fund and some other earmarked spending that is set aside. This number is what I use to figure percent of assets to calculate our yearly withdrawals.
In the spreadsheet I also track both pending capital gains taxes and the taxes due on the tIRAs. All tax rates are best guesses. These numbers give me a good idea of where the gremlins are hiding.
I don't call it net worth ;-) but I total up our financial accounts and show the number. I also have another number with a couple of special accounts subtracted out - DS's college fund and some other earmarked spending that is set aside. This number is what I use to figure percent of assets to calculate our yearly withdrawals.
In the spreadsheet I also track both pending capital gains taxes and the taxes due on the tIRAs. All tax rates are best guesses. These numbers give me a good idea of where the gremlins are hiding.
Actually that is NOT correct. Go look at any public company annual report and you will usually see a line item for deferred liabilities (such as taxes owed, but not paid yet).
That having been said, for my own calculations of NW I do not worry about future tax liability for two reasons: a) non taxed accounts are a small % of my NW and b) I assume by the time I start withdrawing I will be able to manage the issue to some degree. YMMV.
pb4uski
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If you strike the word "current" out of what hesperus wrote then he had it right... but assets would include much more than current assets and liabilities would include much more than current liabilities.
[-]current [/-]assets minus [-]current [/-]liabilities = NW
[-]current [/-]assets minus [-]current [/-]liabilities = NW
Nature Lover
Recycles dryer sheets
I still track NW for perspective, but don't discount pension or other tax deferred assets for taxes. I'm mostly interested in direction and overall magnitude of change over time (simply getting bigger or smaller, and by a little or a lot).
Much more of my time is spent forecasting/reviewing cash flow components, as these are what affect my near-term lifestyle and obligations.
Danmar
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Right, but it's a lot simpler just to look at your broker accounts and not include your real state , pensions, other assets, etc that would make up your true net worth. My spouse is aware of all our assets but doesn't bother to add them all up.
I am not an accountant so I will caveat what I am about to say with that fact.
I don't believe one should calculate pension, or SS for that matter, in determining NW. Each of those streams end if you die and, therefore, aren't calculable at a point in time, which NW, of course, represents.
Obviously, however, Pension and SS play an important role in estimating future cash flows.
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Danmar
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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.
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Given the high end possibilities laid out by FIRECalc this would be good to know. I believe anything earmarked for charity via will or trust is ignored when figuring estate value for Estate Tax purposes.
Gill
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Yes, gifts to charity are deducted from the gross estate to arrive at the taxable estate.
Gill
Fedup
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I thought it's double that for a couple. It's $10 million plus.
Only to the excess over the unified credit (doubled by portability)
kcowan
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When we are talking about estate taxes, it is defined as that of the decedent. So not double.
kcowan
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Yes we always include the NPV of pension to make our projections. We also exclude real estate.
You might be thinking of the UK where the spouse "inherits" the additional exemption amount of the other when they die.
I deduct "obvious tax": basically everything in my LLC goes -1/3, and I have a tax deferred savings account which will taxed at 25% at the end, that goes out too. Reason is that no matter how I twist it, including moving to a tax-free country, I'll never see that money. It's not mine, I just babysit it.
Everything else tax-wise is only used in cash flow projections. That includes a very small tax benefit I will have when/if I get more income into the LLC. It may materialize, but it's not there.
Everything else tax-wise is only used in cash flow projections. That includes a very small tax benefit I will have when/if I get more income into the LLC. It may materialize, but it's not there.
Was reflecting on this answer and it got me to thinking.
Assuming the purpose for you calculating NW is to see SWR on portfolio wouldn't it be better to handle each separately (i.e. not calculate PV/taxes owed on pension to add to NW)?
In other words, calculate SWR on NW (for simplicity all NW are investable assets).
Then, once having that figure add to it after tax Pension payment (and SS) for the year to determine what you can spend safely for the year?
That is how I am looking at any SS or Pension payments (i.e. additive to the WR I'm comfortable with).
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