Net Worth calculation question

[Canadian Helmet]

When calculating your net worth as a family, do you include the full amount of your IRA or RRSP, or do you deduct your expected tax rate.

I have money in an RESP (Canadian (Registered education savings program)) and if we do not us it on post secondary education then we will have to give back a portion.  Should I take that into consideration when calculating my net worth?

[secondcor521]

I know some people who do it that way.  Personally I don't.

When calculating net worth, it's important to decide why or for what purpose you're doing so.  I track probably four or five different net worths for various purposes, and the number varies widely because I'll include or exclude things for various reasons related to what my aim is.

For example, my basic net worth includes the market value of my paid off house.  But I don't include that in my FIRE stash, because I don't want to "spend my house" as part of my 25x expenses.

In general I don't include future potential liabilities in my net worth for several reasons.  The main one is that I usually don't know with very much precision the amount and timing of the liability.  Another is that I include the liability in my expenses when I pay it, so it does get included in my financial picture that way.  Finally, if I did track those liabilities, I'd create more work for myself in terms of estimating those liabilities and updating those estimates; this is work I wouldn't find useful or valuable.

It used to be in the US that leftover 529 money was subject to taxes and a 10% penalty on the earnings portion.  They passed a law a year or two ago that now allow parents, under certain circumstances, to roll 529 money into a Roth IRA tax free.  My family will be able to take full advantage of this new law.  So this is an example of a future tax liability disappearing.

[sparkytheop]

I do not include my future pension, so I see no reason to include future taxes.  I see NW as a moment in time, not trying to predict the future taxes/income/etc.

I consider all of the above when I work out future income calculations though.  Can't spend/save the taxable part of the income.

[Must_ache]

I don't, simply because my effective tax rate is a mystery.  If I were to deduct most or all of my money from the year from a Roth IRA, my tax would be zero, from a traditional IRA, my tax would be nonzero.  Of course I could also plan for it, maybe it would be 5%, or 10% if i had a mix of the two.  Why try to impute an uncertain tax rate to your net worth.  I prefer to recognize that my total assets are $1.8M and if I were doing the 4% rule I could withdraw $72,000 and then figure out how much of that is taxes and how much gets spent and see if that works. 

If you have a pension that pays $1,000 per month, I would keep that separate and figure that my assets need to deliver that much less per month.  But if you are using the 4% rule hard and fast you could take the $12,000 per year divided by .04 and treat that as an additional $300K net worth.  But that would only work if the pension keeps up with inflation like Social Security.  If it doesn't you might only be able to call it $250/mo or $500/mo in today's dollars if your time horizon is a ways out.

[Laura33]

Net worth is a relatively meaningless calculation anyway, beyond just a feel-good, see-how-far-you've-come thing, so I see no reason to further complicate it.

[Michael835]

yes IRA or RESP are assets accounts and should be included in your NW calc.