Net Worth ??

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Phil B
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Net Worth ??

Post by Phil B » Thu Jan 09, 2020 1:38 pm

When determining my net worth..... I include my 401K balance in the ASSETS. Do I include the tax liability for the 401k in the LIABILITIES? :?:

Silk McCue
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Re: Net Worth ??

Post by Silk McCue » Thu Jan 09, 2020 1:44 pm

No.

Cheers

KlangFool
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Re: Net Worth ??

Post by KlangFool » Thu Jan 09, 2020 1:48 pm

Phil B wrote:
Thu Jan 09, 2020 1:38 pm
When determining my net worth..... I include my 401K balance in the ASSETS. Do I include the tax liability for the 401k in the LIABILITIES? :?:
Phil B,

1) No.

2) Unless you can predict the future, you do not know your 401K tax liability.

KlangFool

sailaway
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Re: Net Worth ??

Post by sailaway » Thu Jan 09, 2020 1:51 pm

Do you include the tax liability on your taxable accounts?

Topic Author
Phil B
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Re: Net Worth ??

Post by Phil B » Thu Jan 09, 2020 1:52 pm

Actually yes, should I?

bryanm
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Re: Net Worth ??

Post by bryanm » Thu Jan 09, 2020 1:54 pm

For what purpose are you calculating net worth? If it's to track progression, then it doesn't matter if you include future tax as a liability or not, so long as you are consistent.

Most probably do not track it as a liability. But your intuition is correct: pre-tax dollars are not as valuable as after-tax (or otherwise tax-free) dollars. How you account for that is up to you. It is difficult to predict future tax burden, but a small discount percentage (10-15%) is not unreasonable. (Don't be fooled into saying that you shouldn't discount because the future is unpredictable. That's the same as assigning a 0% discount, so you're still "predicting" something.)

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305pelusa
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Re: Net Worth ??

Post by 305pelusa » Thu Jan 09, 2020 1:56 pm

Phil B wrote:
Thu Jan 09, 2020 1:38 pm
When determining my net worth..... I include my 401K balance in the ASSETS. Do I include the tax liability for the 401k in the LIABILITIES? :?:
Yes, of course. Make an educated guess. If you don’t add it, you’re just stating the tax rate will be zero in the future for you.

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305pelusa
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Re: Net Worth ??

Post by 305pelusa » Thu Jan 09, 2020 1:57 pm

Phil B wrote:
Thu Jan 09, 2020 1:52 pm
Actually yes, should I?
The tax liability on the capital gains of your taxable account will be much lower than the tax liability of your 401k. So it’s less relevant in terms of net worth

azanon
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Re: Net Worth ??

Post by azanon » Thu Jan 09, 2020 1:58 pm

Phil B wrote:
Thu Jan 09, 2020 1:38 pm
When determining my net worth..... I include my 401K balance in the ASSETS. Do I include the tax liability for the 401k in the LIABILITIES? :?:
Quicken doesn't so neither do I. I'm way too lazy to do something like this manually.

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Johnnie
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Re: Net Worth ??

Post by Johnnie » Thu Jan 09, 2020 2:24 pm

305pelusa wrote:
Thu Jan 09, 2020 1:56 pm
Phil B wrote:
Thu Jan 09, 2020 1:38 pm
When determining my net worth..... I include my 401K balance in the ASSETS. Do I include the tax liability for the 401k in the LIABILITIES? :?:
Yes, of course. Make an educated guess. If you don’t add it, you’re just stating the tax rate will be zero in the future for you.
Right, that's what good business accounting requires with "known unknowns" - make a best-guess and adjust as more information comes in, documenting all of it.

I do it mentally with my tax deferred accounts; when I look at the balances there's a little asterix in my mind.
"I know nothing."

Independent George
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Re: Net Worth ??

Post by Independent George » Thu Jan 09, 2020 2:24 pm

To some extent you can, but unless you expect to retire in the next 5 years or so, it relies on a lot of assumptions which makes the exercise more fun than meaningful. Doing so requires that you project not only (1) your future 401k balances (which a lot of us do for planning purposes, usually at a conservative but reasonable number), (2) future social security income (3) future tax rates & bands, (4) future withdrawal schedule, and (5) future assets with tax implications.

While I don't see much benefit to discounting a current net worth calculation, it is always useful to consider the tax implications on your withdrawals. For example, if you retire early and take distributions from your 401k while deferring social security, you can be taxed at a lower rate based on those withdrawals. This also reduces your balance in your 401k so that it can reduce your RMDs (which, if you are also taking social security payments at the same time, might add up to a higher tax bracket). But that sort of tax management strategy is also exactly what makes it harder to discount your current balance by future tax implications - there are just too many options available to you that would change your tax bill. And, once again, it is only useful if you expect to withdraw in the near future.

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goingup
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Re: Net Worth ??

Post by goingup » Thu Jan 09, 2020 2:28 pm

I treat the calculation as a snapshot in time. Right now. Total your assets and liabilities at this moment. (Note, that doesn't include future taxes, withdrawal penalties, realtor broker fees, etc.) The difference between assets and liabilities is your present net worth. :beer

KlangFool
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Re: Net Worth ??

Post by KlangFool » Thu Jan 09, 2020 2:34 pm

Phil B wrote:
Thu Jan 09, 2020 1:52 pm
Actually yes, should I?
No.

KlangFool

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danielc
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Re: Net Worth ??

Post by danielc » Thu Jan 09, 2020 2:43 pm

KlangFool wrote:
Thu Jan 09, 2020 1:48 pm
Phil B,

1) No.

2) Unless you can predict the future, you do not know your 401K tax liability.

KlangFool
Isn't it better to guess your tax liability? Any rough guess will give you a better sense of how much you have than not including taxes at all. I compute my asset allocation on a post-tax basis using my best guess at what my tax rate might be when I retire.

smitcat
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Re: Net Worth ??

Post by smitcat » Thu Jan 09, 2020 2:50 pm

danielc wrote:
Thu Jan 09, 2020 2:43 pm
KlangFool wrote:
Thu Jan 09, 2020 1:48 pm
Phil B,

1) No.

2) Unless you can predict the future, you do not know your 401K tax liability.

KlangFool
Isn't it better to guess your tax liability? Any rough guess will give you a better sense of how much you have than not including taxes at all. I compute my asset allocation on a post-tax basis using my best guess at what my tax rate might be when I retire.

"Isn't it better to guess your tax liability?"
If that is what you want to do and it has value for you wonderful - but that is not "Net Worth"
.

KlangFool
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Re: Net Worth ??

Post by KlangFool » Thu Jan 09, 2020 2:51 pm

danielc wrote:
Thu Jan 09, 2020 2:43 pm
KlangFool wrote:
Thu Jan 09, 2020 1:48 pm
Phil B,

1) No.

2) Unless you can predict the future, you do not know your 401K tax liability.

KlangFool
Isn't it better to guess your tax liability? Any rough guess will give you a better sense of how much you have than not including taxes at all. I compute my asset allocation on a post-tax basis using my best guess at what my tax rate might be when I retire.
danielc,

<<Isn't it better to guess your tax liability? >>

1) No.

2) I can tax-managed my tax liability to near-zero or an insignificant level during retirement.

KlangFool

chicagoan23
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Re: Net Worth ??

Post by chicagoan23 » Thu Jan 09, 2020 2:55 pm

Phil B wrote:
Thu Jan 09, 2020 1:38 pm
When determining my net worth..... I include my 401K balance in the ASSETS. Do I include the tax liability for the 401k in the LIABILITIES? :?:
You could include future taxes in calculating today's net worth. But then be sure to add the future appreciation of your 401(k) account holdings, including anticipated rebalancing, dividends/distributions, etc. I'd assume an annual rate of return equal to the 20% or so you earned in 2019 until you retire and start taking those distributions....congrats you have a net worth in the multi-millions!

smitcat
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Re: Net Worth ??

Post by smitcat » Thu Jan 09, 2020 2:56 pm

KlangFool wrote:
Thu Jan 09, 2020 2:51 pm
danielc wrote:
Thu Jan 09, 2020 2:43 pm
KlangFool wrote:
Thu Jan 09, 2020 1:48 pm
Phil B,

1) No.

2) Unless you can predict the future, you do not know your 401K tax liability.

KlangFool
Isn't it better to guess your tax liability? Any rough guess will give you a better sense of how much you have than not including taxes at all. I compute my asset allocation on a post-tax basis using my best guess at what my tax rate might be when I retire.
danielc,

<<Isn't it better to guess your tax liability? >>

1) No.

2) I can tax-managed my tax liability to near-zero or an insignificant level during retirement.

KlangFool
"1) No."
I agree 100%

"2) I can tax-managed my tax liability to near-zero or an insignificant level during retirement."
That is great but many cannot.

NotWhoYouThink
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Re: Net Worth ??

Post by NotWhoYouThink » Thu Jan 09, 2020 2:57 pm

There are no net worth police, so you can do what you want. And it doesn't have to be the same thing anyone else does. And you can lie to your brother-in-law about any or all of it.

KlangFool
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Re: Net Worth ??

Post by KlangFool » Thu Jan 09, 2020 2:58 pm

smitcat wrote:
Thu Jan 09, 2020 2:56 pm
KlangFool wrote:
Thu Jan 09, 2020 2:51 pm
danielc wrote:
Thu Jan 09, 2020 2:43 pm
KlangFool wrote:
Thu Jan 09, 2020 1:48 pm
Phil B,

1) No.

2) Unless you can predict the future, you do not know your 401K tax liability.

KlangFool
Isn't it better to guess your tax liability? Any rough guess will give you a better sense of how much you have than not including taxes at all. I compute my asset allocation on a post-tax basis using my best guess at what my tax rate might be when I retire.
danielc,

<<Isn't it better to guess your tax liability? >>

1) No.

2) I can tax-managed my tax liability to near-zero or an insignificant level during retirement.

KlangFool
"1) No."
I agree 100%

"2) I can tax-managed my tax liability to near-zero or an insignificant level during retirement."
That is great but many cannot.
smitcat,

"2) I can tax-managed my tax liability to near-zero or an insignificant level during retirement."
That is great but many cannot.

And, many do not have enough retirement income for this to matters.

KlangFool

dbr
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Re: Net Worth ??

Post by dbr » Thu Jan 09, 2020 2:59 pm

chicagoan23 wrote:
Thu Jan 09, 2020 2:55 pm
Phil B wrote:
Thu Jan 09, 2020 1:38 pm
When determining my net worth..... I include my 401K balance in the ASSETS. Do I include the tax liability for the 401k in the LIABILITIES? :?:
You could include future taxes in calculating today's net worth. But then be sure to add the future appreciation of your 401(k) account holdings, including anticipated rebalancing, dividends/distributions, etc. I'd assume an annual rate of return equal to the 20% or so you earned in 2019 until you retire and start taking those distributions....congrats you have a net worth in the multi-millions!
Exactly. I wouldn't try to add the NPV of all future income and expenses into a current net worth calculation.

psteinx
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Re: Net Worth ??

Post by psteinx » Thu Jan 09, 2020 3:12 pm

While NPV of future expenses and income should generally not be included in net worth, taxes that will be due on tax-deferred accounts, or taxable accounts with large embedded gains, are closer to a debt.

i.e. If you have $10K in cash savings, plus a $400K house with a $300K mortgage, most would realize that your net worth is about $110K, not $410K.

If you have $200K in a tax-deferred account, but you can't access those funds without paying taxes on them, then there's a sort of embedded debt there. Yes, figuring out what that debt IS (i.e. the likely future tax rate) requires guesswork - so be it.

And for a taxable account, it's more complex, because the tax deferral itself has value (i.e. reducing the effective taxes due). i.e. If you have $300K in an index fund, with a $200K basis, then there's a good chance you'll eventually pay taxes on that $100K in gains. But even if your tax rate on such gains is 20% now and you expect it to stay at 20% indefinitely, it wouldn't quite be accurate to book a $20K reserve against taxes, because those taxes are deferred, and you get the benefit of that tax-deferred sum indefinitely.

So, there's not an easy answer or easy formula. But if you want an accurate picture of your financial situation, then yes, you should probably make some provision for taxes owed on accounts, as they currently stand.

JBTX
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Re: Net Worth ??

Post by JBTX » Thu Jan 09, 2020 3:18 pm

In theory, strictly speaking, future tax liability would be an offset. Practically speaking, tracking it for NW purposes is pretty pointless, because you don't know what your tax liability will be. You may be able to convert to Roths in a zero tax bracket or in retirement. Some of it will be at different marginal rates.

So no, I don't track it for net worth, but I am aware of it and it is something I'll try to minimize in the future.

JustinR
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Re: Net Worth ??

Post by JustinR » Thu Jan 09, 2020 3:35 pm

Phil B wrote:
Thu Jan 09, 2020 1:38 pm
When determining my net worth..... I include my 401K balance in the ASSETS. Do I include the tax liability for the 401k in the LIABILITIES? :?:
Phil B wrote:
Thu Jan 09, 2020 1:52 pm
Actually yes, should I?
"No" to all your questions in this thread.

22twain
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Re: Net Worth ??

Post by 22twain » Thu Jan 09, 2020 3:47 pm

I consider taxes to be expenses. In my projections, I account for them by including them in my estimated expenses for the year in which I incur them.
My investing princiPLEs do not include absolutely preserving princiPAL.

smitcat
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Re: Net Worth ??

Post by smitcat » Thu Jan 09, 2020 3:52 pm

KlangFool wrote:
Thu Jan 09, 2020 2:58 pm
smitcat wrote:
Thu Jan 09, 2020 2:56 pm
KlangFool wrote:
Thu Jan 09, 2020 2:51 pm
danielc wrote:
Thu Jan 09, 2020 2:43 pm
KlangFool wrote:
Thu Jan 09, 2020 1:48 pm
Phil B,

1) No.

2) Unless you can predict the future, you do not know your 401K tax liability.

KlangFool
Isn't it better to guess your tax liability? Any rough guess will give you a better sense of how much you have than not including taxes at all. I compute my asset allocation on a post-tax basis using my best guess at what my tax rate might be when I retire.
danielc,

<<Isn't it better to guess your tax liability? >>

1) No.

2) I can tax-managed my tax liability to near-zero or an insignificant level during retirement.

KlangFool
"1) No."
I agree 100%

"2) I can tax-managed my tax liability to near-zero or an insignificant level during retirement."
That is great but many cannot.
smitcat,

"2) I can tax-managed my tax liability to near-zero or an insignificant level during retirement."
That is great but many cannot.

And, many do not have enough retirement income for this to matters.

KlangFool
"And, many do not have enough retirement income for this to matters."
That would be correct as well.
But does this apply to the OP?
Should we not post the best answers for all readers and not unintentionally mislead any?

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bligh
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Re: Net Worth ??

Post by bligh » Thu Jan 09, 2020 3:57 pm

Personally I treat taxes as an expense that is managed and planned for like any other. Within obvious constraints I can even work to reduce my annual tax expenses when retired. My current net worth is not impacted by my future expenses, however, if I want to retire, I do need a higher net worth to pay for and support my anticipated tax expenses.

It is sort of like my 529 plans for my kids. I count them as part of my net worth, even though I realize they will eventually need to be spent down. As I spend them down, my net worth will fall. Though isn't that the case for all your assets? Unless you plan to leave your kids everything in inheritance (ie. never retire), you will eventually be faced with spending down your assets to pay for your expenses.

cashboy
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Re: Net Worth ??

Post by cashboy » Thu Jan 09, 2020 4:11 pm

for net worth, as others have mentioned, i view it as a point in time snapshot - and that time is now; future tax is not a liability (the way a debt is).


but, moving on from there to a separate subject, one can take that net worth number and make some assumptions about its 'true value'. perhaps that is what you had in mind?

for example, if my house is currently worth $100,000 it is part of my current net worth at a value of $100,000. but, if/when i sell it via a realtor at 6% commission (say later this year) the true value of that house is $94,000. very simplistic example of 'net worth' of the asset vs the 'true value' of that asset.

another example, if my 401k is currently worth $100,000 it is part of my current net worth at a value of $100,000. but, if/when i sell some of the assets they will be taxed at a certain tax rate (say 10% for simplicity). so the true value of that 401k is $90,000. very simplistic example of 'net worth' of the asset vs the 'true value' of that asset.

i keep two sets of numbers:
one is net worth - using the examples above the net worth is $200,000
the second is true value - using the examples above the true value is $184,000
Three-Fund Portfolio: FSPSX - FXAIX - FXNAX (with slight tilt of CDs - CASH - Canned Beans - Rice - Bottled Water)

dbr
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Re: Net Worth ??

Post by dbr » Thu Jan 09, 2020 4:46 pm

Phil B wrote:
Thu Jan 09, 2020 1:38 pm
When determining my net worth..... I include my 401K balance in the ASSETS. Do I include the tax liability for the 401k in the LIABILITIES? :?:
Why are you determining your net worth? More to the point, what use do you want to make of the number you get? Is someone asking for it, or will the value you get affect some decision you are going to make?

For the individual there is no special significance to net worth nor any set of rules regarding what to include. There isn't anywhere to report it.

Cases where it might matter is when assets come under dispute in a divorce or perhaps when one is estimating how large an umbrella liability insurance policy to carry. In those specialized cases one would consult one's divorce attorney or one's insurance agent.

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JoeRetire
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Re: Net Worth ??

Post by JoeRetire » Thu Jan 09, 2020 5:37 pm

Phil B wrote:
Thu Jan 09, 2020 1:38 pm
When determining my net worth..... I include my 401K balance in the ASSETS. Do I include the tax liability for the 401k in the LIABILITIES? :?:
Feel free to include any future liabilities you choose. There are no laws regarding the calculation of net worth, so you can make up anything you like.

It's not clear what numbers you would actually use, since you would only be guessing at what the tax liability might be. What would be the future value of your 401k? What would be your future tax rate? How much would you remove from the 401k and how much would remain upon your passing? What would the future tax laws be? Should the future numbers be discounted due to the time value of money? And if so, by how much?

I don't include future assets or liabilities in my net worth calculation. But then I like to keep things simple.
Very Stable Genius

chevca
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Re: Net Worth ??

Post by chevca » Thu Jan 09, 2020 5:45 pm

Do whatever you want. If anything has been made clear from all the 'how to figure net worth' threads on BHs, it's that there are thousands of ways to figure it out. Just make up your own system for it. Then, you also get to tell everyone else how they figure it wrong. :happy

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Portfolio7
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Re: Net Worth ??

Post by Portfolio7 » Thu Jan 09, 2020 6:30 pm

Much depends on why you are calculating Net worth.

As mentioned, if you are just trying to grow it over time, just about any reasonable approach is fine.

I track net worth to try to understand what assets are available to me should I change my life circumstances. To do so I include:
- Retirement accounts at full value (I think of taxes as highly variable themselves, and also I think of taxes as an expense.)
- Other accounts at full value
- Property at 90% of average value between Zillow and Realtor.com (the 10% reduction accounts for commissions and a lot of price variables.)
- Business at 90% of calculated value (In this case it's just a dose of conservatism. Really, it could go to zero or zoom much higher.)
- Actual recognized Debt of any kind. (Mortgage, Business Loan, Car loan, Heloc.)
- I exclude cars, furniture, my single gold coin, my baseball cards and comics, all other household items. Not worth tracking. Plus I have old stuff.
Yes, it's a little inconsistent to exclude the car from my assets and yet include the debt in liabilities... but the debt is certain, a car valuation is far from such.
"An investment in knowledge pays the best interest" - Benjamin Franklin

Topic Author
Phil B
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Re: Net Worth ??

Post by Phil B » Thu Jan 09, 2020 7:53 pm

Thanks everyone!

For me, I want to know what how much I have, if I had to sell everything quickly to raise money.

I'll take out what I'd estimate the taxes to be to get a better picture. Probably Net Worth was the wrong term.

Silk McCue
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Re: Net Worth ??

Post by Silk McCue » Thu Jan 09, 2020 8:02 pm

Phil B wrote:
Thu Jan 09, 2020 7:53 pm
Thanks everyone!

For me, I want to know what how much I have, if I had to sell everything quickly to raise money.

I'll take out what I'd estimate the taxes to be to get a better picture. Probably Net Worth was the wrong term.
You need a better plan than a forced distribution of tax deferred funds. Apply for a HELOC if you actually think this may happen.

Cheers

dbr
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Re: Net Worth ??

Post by dbr » Thu Jan 09, 2020 8:05 pm

Phil B wrote:
Thu Jan 09, 2020 7:53 pm
Thanks everyone!

For me, I want to know what how much I have, if I had to sell everything quickly to raise money.

I'll take out what I'd estimate the taxes to be to get a better picture. Probably Net Worth was the wrong term.
Actually you might want to pay great attention to the taxes. If you sell everything now you might have to pay a lot of taxes as a consequence. Now the consequences might not have to be paid until the end of the year, or even longer depending how long you drag out your dispute with the IRS if you don't pay. Some assets might not even be obtainable without having to have withholding taken.

I think the best thing is you have to make a list and see what is involved to actually sell this, that, or the other thing.

SovereignInvestor
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Re: Net Worth ??

Post by SovereignInvestor » Thu Jan 09, 2020 9:44 pm

Phil B wrote:
Thu Jan 09, 2020 1:38 pm
When determining my net worth..... I include my 401K balance in the ASSETS. Do I include the tax liability for the 401k in the LIABILITIES? :?:
Yeah there should be some provision for income taxes. It's misleading not to because then ROTH = Traditional.

Tax liability on taxable account can easily be reduced substantially since there is a basis and LTCG can easily be taxed at 0%.

Pretax 401k has no basis.

I multiply all pretax accounts by 0.8 assuming 20% tax.

Yes I can never be sure 20% assumed tax will be correct but just because there's a lot of.uncertainty doesn't mean picking 0% by not using any tax liabilot is better.

"I don't know if my tax rate will be 12% or 25%, so let's use 0%" just doesn't make sense.

Yeah if someone had a small balance and no other income (or rest in ROTH) when they'd pull it out then maybe the rate can be zero. But for the people on the board with sizable amounts well into 6 figures or more there's no way the money would come out of account with a tax rate anywhere near 0%.

smitcat
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Re: Net Worth ??

Post by smitcat » Fri Jan 10, 2020 9:17 am

Phil B wrote:
Thu Jan 09, 2020 7:53 pm
Thanks everyone!

For me, I want to know what how much I have, if I had to sell everything quickly to raise money.

I'll take out what I'd estimate the taxes to be to get a better picture. Probably Net Worth was the wrong term.
Yes - that is great for you but its not Net worth.
There are reasons why you would calculate "Net Worth" (like SBA loans) and in those cases you use the real definition of Net Worth and do not take out potential taxes.

rbaldini
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Re: Net Worth ??

Post by rbaldini » Fri Jan 10, 2020 9:47 am

Evidently “net worth” is a vague term because there is substantial disagreement here as to how it should be calculated.

When I calculate net worth, I don’t account for any taxes on 401k, etc

On the other hand, when I calculate asset allocation, I do discount my 401k holdings by an approximate tax rate. Same with taxable investments. I figure this gives me a slightly better idea of how much stock and bond I “really” own.

ljford7
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Re: Net Worth ??

Post by ljford7 » Fri Jan 10, 2020 9:48 am

Assets - Liabilities = Net Worth

It is as simple as above.

Another way to look at it is: (House + Investments + Banking Accounts + Vehicles + Stuff in House) - (Loans + Credit Cards) = Net Worth

dbr
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Re: Net Worth ??

Post by dbr » Fri Jan 10, 2020 9:53 am

ljford7 wrote:
Fri Jan 10, 2020 9:48 am
Assets - Liabilities = Net Worth

It is as simple as above.

Another way to look at it is: (House + Investments + Banking Accounts + Vehicles + Stuff in House) - (Loans + Credit Cards) = Net Worth
It isn't simple if a person is trying to figure out what items are assets and what items are liabilities. The OP was asking, for example, if future tax costs are liabilities. That is particularly confusing regarding deferred taxes on retirement accounts. People can also ask whether future entitlements such as pensions and Social Security are assets.

Probably the most conventional and useful answer is that net worth should consider only current assets and liabilities and not the present value of future positive or negative income streams. But there are situations where any of those things come into account.

beehivehave
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Re: Net Worth ??

Post by beehivehave » Fri Jan 10, 2020 10:05 am

Phil B wrote:
Thu Jan 09, 2020 1:38 pm
When determining my net worth..... I include my 401K balance in the ASSETS. Do I include the tax liability for the 401k in the LIABILITIES? :?:
Unless the liability is immediate, no. If you do, you should also include all future expenses in liabilities.
That would lead to double counting when deciding if future income is enough to meet future expenses.
Most people use cash not accrual accounting methods for personal purposes.
Last edited by beehivehave on Fri Jan 10, 2020 10:22 am, edited 1 time in total.

beehivehave
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Re: Net Worth ??

Post by beehivehave » Fri Jan 10, 2020 10:21 am

dbr wrote:
Fri Jan 10, 2020 9:53 am
ljford7 wrote:
Fri Jan 10, 2020 9:48 am
Assets - Liabilities = Net Worth

It is as simple as above.

Another way to look at it is: (House + Investments + Banking Accounts + Vehicles + Stuff in House) - (Loans + Credit Cards) = Net Worth
It isn't simple if a person is trying to figure out what items are assets and what items are liabilities. The OP was asking, for example, if future tax costs are liabilities. That is particularly confusing regarding deferred taxes on retirement accounts. People can also ask whether future entitlements such as pensions and Social Security are assets.

Probably the most conventional and useful answer is that net worth should consider only current assets and liabilities and not the present value of future positive or negative income streams. But there are situations where any of those things come into account.
Why would anyone need to know net worth? Other than for ego purposes, this is the wrong question.
The real question in investing is whether your future income from investments will meet expenses.
In which case it is simpler for purposes of AA planning to subtract expected pensions and SS from future expenses. How would you categorize such income sources? No need to mix apples and oranges.
Granted, there is one complication because most models for estimating AA assume some level of inflation: Non-inflation adjusted sources of income (e.g., some pensions).

Cash is King
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Re: Net Worth ??

Post by Cash is King » Fri Jan 10, 2020 10:38 am

dbr wrote:
Fri Jan 10, 2020 9:53 am
ljford7 wrote:
Fri Jan 10, 2020 9:48 am
Assets - Liabilities = Net Worth

It is as simple as above.

Another way to look at it is: (House + Investments + Banking Accounts + Vehicles + Stuff in House) - (Loans + Credit Cards) = Net Worth
It isn't simple if a person is trying to figure out what items are assets and what items are liabilities. The OP was asking, for example, if future tax costs are liabilities. That is particularly confusing regarding deferred taxes on retirement accounts. People can also ask whether future entitlements such as pensions and Social Security are assets.

Probably the most conventional and useful answer is that net worth should consider only current assets and liabilities and not the present value of future positive or negative income streams. But there are situations where any of those things come into account.
DBR, you can choose to calculate your NW by using current assets-liabilities but to state that it's "the most conventional and useful answer is 100% wrong.

Assets-Liabilities= Net Worth. Period. By the way, Social Security and pensions are considered income.

Cheers.

Silk McCue
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Re: Net Worth ??

Post by Silk McCue » Fri Jan 10, 2020 10:46 am

Cash is King wrote:
Fri Jan 10, 2020 10:38 am

DBR, you can choose to calculate your NW by using current assets-liabilities but to state that it's "the most conventional and useful answer is 100% wrong.

Assets-Liabilities= Net Worth. Period. By the way, Social Security and pensions are considered income.

Cheers.
Sorry - you can’t settle this long running discussion at Bogleheads by declaring DBR is wrong. You also can’t stop people from choosing to include the present value of pensions and SS if they want to.


Cheers

bryanm
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Re: Net Worth ??

Post by bryanm » Fri Jan 10, 2020 11:27 am

Cash is King wrote:
Fri Jan 10, 2020 10:38 am
DBR, you can choose to calculate your NW by using current assets-liabilities but to state that it's "the most conventional and useful answer is 100% wrong.

Assets-Liabilities= Net Worth. Period. By the way, Social Security and pensions are considered income.

Cheers.
Even assuming you're correct, traditional 401k dollars are less valuable than roth 401k dollars. Thus, as an asset, they are worth less. (Moving the discount from liabilities to assets to satisfy some formula seems pedantic, but that's where we're at.)

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sperry8
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Re: Net Worth ??

Post by sperry8 » Fri Jan 10, 2020 12:03 pm

Phil B wrote:
Thu Jan 09, 2020 1:38 pm
When determining my net worth..... I include my 401K balance in the ASSETS. Do I include the tax liability for the 401k in the LIABILITIES? :?:
I have two line items for net worth... one pre-tax. The other post tax (assuming 15% off the total). I don't know what tax rates will be - but I know for sure they aren't zero.
BH contest results: 2019: #233 of 645 | 18: #150 of 493 | 17: #516 of 647 | 16: #121 of 610 | 15: #18 of 552 | 14: #225 of 503 | 13: #383 of 433 | 12: #366 of 410 | 11: #113 of 369 | 10: #53 of 282

magicrat
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Re: Net Worth ??

Post by magicrat » Fri Jan 10, 2020 12:05 pm

Do you also include other future spending buckets (e.g., food, housing) as a liability?

smitcat
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Re: Net Worth ??

Post by smitcat » Fri Jan 10, 2020 12:07 pm

beehivehave wrote:
Fri Jan 10, 2020 10:21 am
dbr wrote:
Fri Jan 10, 2020 9:53 am
ljford7 wrote:
Fri Jan 10, 2020 9:48 am
Assets - Liabilities = Net Worth

It is as simple as above.

Another way to look at it is: (House + Investments + Banking Accounts + Vehicles + Stuff in House) - (Loans + Credit Cards) = Net Worth
It isn't simple if a person is trying to figure out what items are assets and what items are liabilities. The OP was asking, for example, if future tax costs are liabilities. That is particularly confusing regarding deferred taxes on retirement accounts. People can also ask whether future entitlements such as pensions and Social Security are assets.

Probably the most conventional and useful answer is that net worth should consider only current assets and liabilities and not the present value of future positive or negative income streams. But there are situations where any of those things come into account.
Why would anyone need to know net worth? Other than for ego purposes, this is the wrong question.
The real question in investing is whether your future income from investments will meet expenses.
In which case it is simpler for purposes of AA planning to subtract expected pensions and SS from future expenses. How would you categorize such income sources? No need to mix apples and oranges.
Granted, there is one complication because most models for estimating AA assume some level of inflation: Non-inflation adjusted sources of income (e.g., some pensions).
"Why would anyone need to know net worth? Other than for ego purposes, this is the wrong question."
For many loans the conventional Net Worth definition is required on the application.

bryanm
Posts: 226
Joined: Mon Aug 13, 2018 3:48 pm

Re: Net Worth ??

Post by bryanm » Fri Jan 10, 2020 12:10 pm

magicrat wrote:
Fri Jan 10, 2020 12:05 pm
Do you also include other future spending buckets (e.g., food, housing) as a liability?
This is a red herring. Discounting an asset because of taxes due is not accounting for a future liability, it's accounting for a lower present value. If I have a check for $1000, but I know it will bounce, do I still value it at $1000? Of course not. If I have a check for $1000, but know I could only cash it for $850, why would I still value it at $1000? If I don't know exactly how much it would cash for, then I'd better make a best guess.

Cash is King
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Re: Net Worth ??

Post by Cash is King » Fri Jan 10, 2020 12:14 pm

Silk McCue wrote:
Fri Jan 10, 2020 10:46 am
Cash is King wrote:
Fri Jan 10, 2020 10:38 am

DBR, you can choose to calculate your NW by using current assets-liabilities but to state that it's "the most conventional and useful answer is 100% wrong.

Assets-Liabilities= Net Worth. Period. By the way, Social Security and pensions are considered income.

Cheers.
Sorry - you can’t settle this long running discussion at Bogleheads by declaring DBR is wrong. You also can’t stop people from choosing to include the present value of pensions and SS if they want to.


Cheers
Well, DBR is wrong but you are correct that it will not settle this ongoing discussion. On your last point, I never stated anything about including present value. People are free to do whatever they choose.

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