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

[scrabbler1]

I happen to keep track of unrealized cap gains in each MF's spreadsheet so all I had to do was to add them up for the 4 funds in the taxable accounts. Then I added the total value of my tIRA and divided the sum by my NW. Using 11/30/2016 figures, the latest ones I have (so it doesn't include this month's run-up), I get 34%.


At the moment I viewed the survey results (46 votes), it's amazing how evenly spread out the responses are, 4-6 votes in all brackets except for the two lowest ones (2 each).

 

[Toocold]

I happen to keep track of unrealized cap gains in each MF's spreadsheet so all I had to do was to add them up for the 4 funds in the taxable accounts. Then I added the total value of my tIRA and divided the sum by my NW. Using 11/30/2016 figures, the latest ones I have (so it doesn't include this month's run-up), I get 34%.

I admit I don't track unrealized capital. I'm realizing that this forum is made up of people who are even more analytical than me.

 

[pb4uski]

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

 

[sheehs1]

I simply totaled all of my tax deferred accounts and did a simple percentage calculation. I did not include unrealized cap gains in my taxable accounts...because who knows what they will really be! Even if I added that to the mix, it wouldn't have moved the needle all that much and still puts me in the category I voted.

So...based on just investable assets it's 22%
Based on total net worth it's 13.9% **
** except some of this net worth is an asset in a family business and I pay tax on a K1 each year...so I'm not sure how to factor that in. I suppose I categorize that as income and don't take it into this calculation. I added into net worth only the baseline "estate value".

I have far less in deferred accounts than in taxable accounts I've already paid tax on.

 

[NoOneGetsIt]

How are we doing...why am I still working?

1.7M non taxable [cash, Roths, cost basis]
485k deferred tax
550 taxable
house paid for
do debt

 

[NW-Bound]

You mean in your case? Because for others it may be lower because of Roth.

I never lumped in Roth accounts with IRA & 401k. Roth money is really golden.

That said, I only have about 7% of investable assets in Roth, not being able to convert much.

 

[devans0]

39% , but will drop to 33% after 2017 conversion to Roth.

 

[audreyh1]

Correct. In the OP, you will see examples of what portion of what types of accounts should be counted in the numerator. Denominator is your NW.
The logic is that a person with net worth 1M may have close to 90% of their net worth in 401k and unrealized capital gains. In which case they have to do a lot more tax planning to access that. OTOH there are those who may have 1M NW but most of it in Roth and bank CDs and their % of NW that still needs to go through the tax man will be negligible.

Well - that can be all over the map. If someone bought assets at very low prices and they appreciated considerably, maybe. But if someone hasn't held assets that long and/or they've been paying out dividends and distributions over many years, and occasionally rebalancing, maybe the basis isn't that much lower than the current value.

I don't think I'll be figuring this out. Too many assets spread over too many accounts......

 

[kcowan]

I don't think I'll be figuring this out. Too many assets spread over too many accounts......

My attitude as well! Who is paying me for this work and what is the answer worth? I imagine the answers will come from those with relatively simple portfolios. So the sample will be skewed.

 

[NW-Bound]

I do not know exactly to the 1%, but I have an approximation to the 10%.

It is important not to draw down the after-tax accounts too much, lest you need a lot of money in a hurry. Buying a home with cash is an extreme situation, but I like to have a good chunk of tax-free money on hand. I have always wanted a lot of room to maneuver, a lot of options.

 

[Montecfo]

For me, not too hard since I know the balances in each account and account type. And unrealized gains are listed by the brokerage. My number was 57% including home. If you just look at investments, it was 70%.

This was interesting as I new my untaxed percentage was on this high side, but had not calculated (not drawing money from investments yet)

 

[gerntz]

For me, the calculation was pretty easy because my investments are very basic.

Our investments are fairly complex but the calculation was even easier than yours: I stuck my thumb up & said that's about right.

 

[Danmar]

My attitude as well! Who is paying me for this work and what is the answer worth? I imagine the answers will come from those with relatively simple portfolios. So the sample will be skewed.

Agree. My portfolio is virtually all in taxable accounts. I know my tax basis so also know my imbedded gains and tax rate on cap gains. Probably a good thing to know especially if you have plans to sell down. Probably too complicated for some people to calculate frequently though.

 

[mrfeh]

Interesting question. In our case, the percentage is around 37%. About 3/4 of the money that hasn't been taxed is in 401Ks and traditional IRAs.

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

 

[OnTheBeach]

When I do my net worth calculations, I calculate the market value, cost basis and tax liability on the unrealized gains so my Net Worth is after paying taxes on unrealized gains. Thus the percentage of my net worth that is taxable is 0%. I assumed everyone did it this way.....yeah yeah never assume. if you don't calculate this way, how can you figure out your annual withdrawal rate? A person withdrawing 3% of a money market annually is much different than a person withdrawing 3% of an 401K that was never taxed.

 

[Montecfo]

When I do my net worth calculations, I calculate the market value, cost basis and tax liability on the unrealized gains so my Net Worth is after paying taxes on unrealized gains. Thus the percentage of my net worth that is taxable is 0%. I assumed everyone did it this way.....yeah yeah never assume. if you don't calculate this way, how can you figure out your annual withdrawal rate? A person withdrawing 3% of a money market annually is much different than a person withdrawing 3% of an 401K that was never taxed.

Sure. But you just estimate taxes as part of your expenses-based upon the account you will be drawing from, etc.

Or at least, that is what I do.

 

[NW-Bound]

For me, not too hard since I know the balances in each account and account type. And unrealized gains are listed by the brokerage...

+1

I just have to have a spreadsheet to sum them up, but I can eyeball it to have an idea.

I never bothered to look at the cap gains in my homes. I have no immediate plan to sell them, plus the gains are small relative to my to-be-taxed investable accounts.

 

[Danmar]

Sure. But you just estimate taxes as part of your expenses-based upon the account you will be drawing from, etc.

Or at least, that is what I do.

Agree. Also what I do. Drawing down from a taxable account may have a tax cost which needs to be considered on the spend side. Probably easier to do it this way rather than trying to adjust the draw down percentage. Although, I do agree that best way to calculate net worth would be to include an expected tax liability.

 

[mrfeh]

Net worth is the current value of all assets minus liabilities.

One can subtract estimated future taxes for planning purposes if they wish, but the resulting number is not net worth.

 

[Danmar]

Net worth is the current value of all assets minus liabilities.

One can subtract estimated future taxes for planning purposes if they wish, but the resulting number is not net worth.

Yes, I think it is. If a liability will be created in the realization of an asset it should be accounted for. A good example in the corporate world would be deferred taxes. This is often referred to as the matching principle.

 

[audreyh1]

When I do my net worth calculations, I calculate the market value, cost basis and tax liability on the unrealized gains so my Net Worth is after paying taxes on unrealized gains. Thus the percentage of my net worth that is taxable is 0%. I assumed everyone did it this way.....yeah yeah never assume. if you don't calculate this way, how can you figure out your annual withdrawal rate? A person withdrawing 3% of a money market annually is much different than a person withdrawing 3% of an 401K that was never taxed.

No problem. My withdrawal is pre-tax. My spending is after tax. I always computed withdrawal as pre-tax and knew I'd have to pay taxes from it. So estimating annual taxes is important.

 

[NW-Bound]

Net worth is the current value of all assets minus liabilities.

One can subtract estimated future taxes for planning purposes if they wish, but the resulting number is not net worth.

Yes, I think it is. If a liability will be created in the realization of an asset it should be accounted for. A good example in the corporate world would be deferred taxes. This is often referred to as the matching principle.

One is net worth, and the other is "spendable" net worth.

The problem is that, with a progressive tax system, it is difficult to figure out exactly how much one will pay when the spending level fluctuates so much as in my case. My highest spending year was 1.5x my lowest one. That would put me in a higher bracket, if it were not for some after-tax buffer to allow averaging out the WR.

Hence, knowing how much one has in tax-free money is important.

 

[Danmar]

One is net worth, and the other is "spendable" net worth.

The problem is that, with a progressive tax system, it is difficult to figure out exactly how much one will pay when the spending level fluctuates so much as in my case. My highest spending year was 1.5x my lowest one. That would put me in a higher bracket, if it were not for some after-tax buffer to allow averaging out the WR.

Hence, knowing how much one has in tax-free money is important.

There is another accounting principle called"best estimate". Ie you take your best shot at it rather than ignoring it. In my case it is easy since I will always be paying at the max marg rate.

But in the overall scheme of things you can do whatever you want in this regard and who cares what the other guy does?

 

[NW-Bound]

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?).

 

[RunningBum]

When I do my net worth calculations, I calculate the market value, cost basis and tax liability on the unrealized gains so my Net Worth is after paying taxes on unrealized gains. Thus the percentage of my net worth that is taxable is 0%. I assumed everyone did it this way.....yeah yeah never assume. if you don't calculate this way, how can you figure out your annual withdrawal rate? A person withdrawing 3% of a money market annually is much different than a person withdrawing 3% of an 401K that was never taxed.

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. It makes budgeting easier for me because I don't have to worry about whether I how to budget for taxes on Roth conversions or if I sell funds with capital gains. It does complicate budget tracking a bit because I have to separate out the income tax paid on that vs. the normal tax on dividends and interest, which I do budget for.

It wouldn't matter to me if I'm the only one that does this. If it's the best way for me to understand my finances, that's what I'm doing. I don't disclose my net worth anyway, so nobody should take issue with how I define my net worth for my own purposes. I may not be doing it the "right" way, but as long as I'm accounting for taxes I'm not doing it wrong.