In figuring net worth, how do you account for pre-tax $$ in retirement accounts?

[RedmondStash]

I know our net worth, but it includes both post-tax and pre-tax money; a significant percentage of our net worth is in pre-tax (tax-deferred) IRA and 401k accounts.

When you calculate net worth, do you shave off the amount of tax you expect to pay on money in pre-tax accounts? Or do you plan to find ways to keep withdrawals and spending low enough that you can probably avoid paying taxes on that money? I've read the various articles about reducing and (legally) avoiding taxes, but I don't think I've seen this question addressed with respect to determining actual net worth.

I'm less concerned about non-retirement accounts because the tax laws are much friendlier to capital gains, but every dollar that comes out of our tax-deferred accounts is potentially eligible to be taxed, especially if we want to start doing IRA to Roth conversions.

[VoteCthulu]

I keep track of the taxes owed on the expenses side of my equation, because it's more than 50% of my invested assets and it seems easier that way.

[sokoloff]

I have a column next to each account called "expected tax burden" that I have set to 50% for most pre-tax accounts and set to a variable amount (depending on the level of gains in the account) for the after-tax accounts.

I don't expect to pay quite 50%, so the spreadsheet is a little conservative, but I think it's going to be north of 40% (combined fed and state) by the time I'm taking that money out.

[Eric]

I have a column next to each account called "expected tax burden" that I have set to 50% for most pre-tax accounts and set to a variable amount (depending on the level of gains in the account) for the after-tax accounts.

I don't expect to pay quite 50%, so the spreadsheet is a little conservative, but I think it's going to be north of 40% (combined fed and state) by the time I'm taking that money out.

A 40% effective tax rate?  In the US?  I think you're taking crazy pills.


I personally don't discount my net worth for taxes, but I also don't expect to pay much in the way of taxes, so that makes it pretty easy.

[FIRE Artist]

I don't consider it in my net worth calculation, but do consider it when estimating how big the stash needs to be to support my desired after tax withdrawl amount.  Since how you draw down your accounts is critical for calculating and minimizing your marginal tax rate, it is worth modelling as you approach FIRE.  (Do as I say, not as I do, since I have not yet acted on this even though I have thought about it several times over the last year).  I am Canadian BTW, it is much harder for us to have zero tax in retirement than in the US as I have gleaned from this site.

[Laura33]

I think for most people here, the tax impacts are pretty minimal, especially with the new tax plan; between a $24K standard deduction for income from pre-tax accounts, and the favorable CG rates for any assets you sell, most are expecting to pay little to no taxes.

We are not really in the RE crowd, and we are not expecting a huge drop in tax bracket, so we just guesstimated an effective rate based on our experiences over the past decade or so and our projected future RE budget.*  As it happens, we just recently took a closer look at our asset breakdown to figure out our likely effective tax rate (how much "no tax" accounts[Roth/cash] vs. "regular taxable income" stuff [401(k)/IRA/SS] vs. CGs [stocks/MFs]), and the guesstimate we had been working with was within about one percentage point of that more detailed breakdown.

Of course, it's all a crapshoot; even if I FIREd today, Congress could change the tax laws 10 times before I die.  So my plan is more guesstimate + flexibility of multiple types of investments so I can adjust my withdrawals to whatever ratios are most beneficial at that time.

*Like the others here, I have never tried to adjust NW for taxes -- I look at it in terms of how much I will need to withdraw in any future year to pay taxes + cover my budget.  But I guess you could just scale up your required NW by whatever you expect your effective tax rate to be.

[sokoloff]

I don't expect to pay quite 50%, so the spreadsheet is a little conservative, but I think it's going to be north of 40% (combined fed and state) by the time I'm taking that money out.

A 40% effective tax rate?  In the US?  I think you're taking crazy pills.

<Shrug />
My 2015 effective tax rate [excluding payroll and FICA] ((total federal tax plus total state tax) divided by AGI) was 39.1%. I don't have my 2016 completed return handy, but it was similar.

I expect my retirement withdrawals will be slightly more tax-efficient, but I also expect that high-income tax rates will be higher in 2038 than in 2018.

[Eric]

I don't expect to pay quite 50%, so the spreadsheet is a little conservative, but I think it's going to be north of 40% (combined fed and state) by the time I'm taking that money out.

A 40% effective tax rate?  In the US?  I think you're taking crazy pills.

My 2015 effective tax rate [excluding payroll and FICA] ((total federal tax plus total state tax) divided by AGI) was 39.1%. I don't have my 2016 completed return handy, but it was similar.

I expect my retirement withdrawals will be slightly more tax-efficient, but I also expect that high-income tax rates will be higher in 2038 than in 2018.

But you're working right now, yes?  First, congrats on landing a job that pays in the high 6 figures!  Have you considered simply spending less money when you're retired?  Because spending ~$600,000/yr seems like it must be pretty wasteful.  Maybe check out this great website to help cut your spending.

[sokoloff]

But you're working right now, yes?  First, congrats on landing a job that pays in the high 6 figures!  Have you considered simply spending less money when you're retired?  Because spending ~$600,000/yr seems like it must be pretty wasteful.  Maybe check out this great website to help cut your spending.

Thanks for the tip; I'll be sure to check it out just as soon as the effects of these crazy pills wear off...

[CCCA]

Our Federal income tax rate is very low (~3-4%) and we expect that to continue (or go down) when we are no longer working.  We won't have to pay Medicare or SS taxes on our retirement income either.  So I don't really account for taxes in our numbers.

[MDM]

My 2015 effective tax rate [excluding payroll and FICA] ((total federal tax plus total state tax) divided by AGI) was 39.1%. I don't have my 2016 completed return handy, but it was similar.

I expect my retirement withdrawals will be slightly more tax-efficient, but I also expect that high-income tax rates will be higher in 2038 than in 2018.

For 2018, even in a high tax state such as Oregon, it will likely take over $900K AGI to hit 39.1%.  In most states, probably >$1 million.

[Bicycle_B]

Minimally FI, living in a state with no income tax.  I voluntarily incur 3-4% federal tax on Adjusted Gross Income because doing so allows me to set income at a level that qualifies for several thousand dollars of ACA health care premium subsidies.  I count pre-tax $ in retirement accounts at face value. 

I agree that the issue should be considered as you plan your FI expenses.   I calculate available retirement income based on a straight 4% of assets, modified by specific factors (example, pension income expected in excess of 4% of the pension account value) but keep declared income low enough that the tax is a small factor.  I have a much larger fudge factor from future Social Security income than the small amount I pay in tax.

[SugarMountain]

I know our net worth, but it includes both post-tax and pre-tax money; a significant percentage of our net worth is in pre-tax (tax-deferred) IRA and 401k accounts.

When you calculate net worth, do you shave off the amount of tax you expect to pay on money in pre-tax accounts? Or do you plan to find ways to keep withdrawals and spending low enough that you can probably avoid paying taxes on that money? I've read the various articles about reducing and (legally) avoiding taxes, but I don't think I've seen this question addressed with respect to determining actual net worth.

I'm less concerned about non-retirement accounts because the tax laws are much friendlier to capital gains, but every dollar that comes out of our tax-deferred accounts is potentially eligible to be taxed, especially if we want to start doing IRA to Roth conversions.

I include the full value of our tax deferred accounts when calculating my stache.  However, when calculating expense projections I include an expected tax burden (currently using 20% as a rough figure, which I is likely too high).  Even post tax accounts will potentially have a tax impact, although at the lower rate for capital gains. 

I did just see an article about how doing a Roth conversion in the next few years is probably a good idea because while you'll pay income tax at that point, the rates are going to be lower for the next 5 years.  Only really works if you're retiring in that period.

In my networth/stache calculations, I do deduct ~40% on employee stock options value, since those do get hammered by taxes and I need to convert them to money while I'm still working.

I don't deduct either the 6% realtor fees or capital gains taxes when including our rental property value towards NW/stache, although probably should.  I actually suspect we'll move into it for a couple of years to avoid capital gains. (glad that didn't go away with the tax bill).

[RedmondStash]

Thanks, folks. Some good ideas in here. I think I'll just add a column to my spreadsheet that calculates net worth after expected taxes, but use the whole net worth for most of my calculations. I use some pretty conservative projections in other areas, so it balances out.

[PhilB]

I use post-tax figures in anything that is going to be used in decision making eg my decumulation spreadheet showing what income I can expect in retirement, or modelling the impact of working for more / fewer months before pulling the plug.

Net worth, on the other hand, I regard as really just a vanity number so I use pre tax figures to make it bigger. :o)

[boarder42]

so during the 5 year gap when i'm drawing down taxable - what does that do to my AGI

For sake of arguement lets just say i'm converting 77400 - the top of the 12% bracket

and then my taxable account withdrawal creates 24k in taxable income - but its not taxed since i'm in the 12% bracket

does this make my AGI 77400 or 77400-24k .

[Tabaxus]

I take 40% off.  Probably too high.  But I run things gross and net of tax.  Do the same thing with my taxable account--lop 20% off the appreciation.

[RedmondStash]

so during the 5 year gap when i'm drawing down taxable - what does that do to my AGI

For sake of arguement lets just say i'm converting 77400 - the top of the 12% bracket

and then my taxable account withdrawal creates 24k in taxable income - but its not taxed since i'm in the 12% bracket

does this make my AGI 77400 or 77400-24k .

Your AGI would be 77,400 + 24,000, although you're also ignoring the standard deduction ($12k for individual, $24k for married). When you take money out of an IRA, whether it's being converted to Roth or just being spent, it's taxed as ordinary/employment income, so you've maxed out that bracket. The $24k would then kick you up into having capital gains taxed, so it would be taxed at 15%, if it's long-term gains. (If it's short-term gains, it'd be taxed as ordinary income, at 22%.)

If you include the standard deduction and you're married, that $24k in income would be offset by the standard deduction, so you'd stay inside the 12% bracket and pay 0% on long-term cap gains.

My goal is to keep us under that 77,400 cap for all income, taking into account the standard deduction, and including IRA conversions and taxable capital gains. So that gives us a little over $100k to play with and stay under the cap of the 12% bracket.

[gobius]

I count it fully.  With $24K in standard deduction for a married couple I anticipate paying very low taxes so it doesn't affect it much, unless for some reason I have to pay the 10% penalty.  So I suppose I could worst-case discount my retirement accounts by 12% or so.

[SugarMountain]

Do dividends get the same preferential tax rate as capital gains?

[MDM]

Do dividends get the same preferential tax rate as capital gains?

Yes, if they are Qualified Dividends.

[SugarMountain]

Do dividends get the same preferential tax rate as capital gains?

Yes, if they are Qualified Dividends.

Thanks. Now I need to go look at my ETFs to see whether they're paying qualified or non-qualified dividends (I guess I should be able to see from this year's 1099-DIVs.  I tend to just put in the numbers and let TurboTax do the rest.)

ETF Dividends

[MDM]

I guess I should be able to see from this year's 1099-DIVs.

Yes.  Total dividends go in box 1a.  The portion of 1a that is qualified goes in box 1b.

[bluebelle]

I calculate net worth at pre-tax $$.  But as others have said,  when I calculate what I need, I add in the taxes.  And I use a slightly higher tax rate than I expect to be paying to act as a buffer, 'cuz, hey, taxes will only go up.

If I want $40K after taxes, I assume a average tax rate of 17%, when it's probably closer to 15%, and I already have a buffer built in to the 40K. 

[seattlecyclone]

I just use the pre-tax amount. With the current tax brackets I expect not to exceed the 12% tax bracket with regular income during FIRE, with an effective rate likely under 10%. I could knock off 10% from the tax-deferred retirement accounts, but if I did that I'd probably feel obligated to go ahead and knock a couple percent off the taxable accounts too, and that just seems like too much hassle.

[boarder42]

so during the 5 year gap when i'm drawing down taxable - what does that do to my AGI

For sake of arguement lets just say i'm converting 77400 - the top of the 12% bracket

and then my taxable account withdrawal creates 24k in taxable income - but its not taxed since i'm in the 12% bracket

does this make my AGI 77400 or 77400-24k .

Your AGI would be 77,400 + 24,000, although you're also ignoring the standard deduction ($12k for individual, $24k for married). When you take money out of an IRA, whether it's being converted to Roth or just being spent, it's taxed as ordinary/employment income, so you've maxed out that bracket. The $24k would then kick you up into having capital gains taxed, so it would be taxed at 15%, if it's long-term gains. (If it's short-term gains, it'd be taxed as ordinary income, at 22%.)

If you include the standard deduction and you're married, that $24k in income would be offset by the standard deduction, so you'd stay inside the 12% bracket and pay 0% on long-term cap gains.

My goal is to keep us under that 77,400 cap for all income, taking into account the standard deduction, and including IRA conversions and taxable capital gains. So that gives us a little over $100k to play with and stay under the cap of the 12% bracket.

i was including the standard deduction just didnt lay it out explicitly.  should be no issue to stay in the 12% bracket in the years post 5 year bridge its those leading up to it that may sting a little for us

[SugarMountain]

I guess I should be able to see from this year's 1099-DIVs.

Yes.  Total dividends go in box 1a.  The portion of 1a that is qualified goes in box 1b.

Yeah, I was just looking at my 2016 1099s.  This thread has given me a lot to chew on, thanks so much.  I believe I've been over estimating my tax burden, at least in our 50s when we'll be living off of our taxable accounts.  We should be able to structure things so we pay very little in federal income taxes.  Assuming we keep things below an AGI of $77k, really the only components that will be taxed are interest income and non-qualified dividends.  Qualified dividends, capital gains, and any principal we spend won't be taxed at all at the Federal level. (I need to take a look at our state income tax situation.)  Ironically, our tax burden may go up significantly in our 70s when we've also got social security & forced withdrawals from IRA/401k.  I'll have to evaluate rolling some of that into Roth IRAs prior to that.