Want to Know Your Net Worth? Don’t Forget This

Calculating your net worth doesn’t have to be complicated.

In this segment of “Financial Planning Q&A” on Motley Fool Live, recorded on Dec. 1, Fool contributor Dan Caplinger shares a tip on how to calculate net worth.

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Dan Caplinger: [From Dave] I’m struggling to calculate how to account for tax liability on my deferred accounts like traditional IRA. Suggest, do you use a net present value calculation based on requirement on distributions? Do you use a 100% withdrawal rate? How do you handle it?

Dave, I have to say, I think most net-worth calculators don’t handle it at all, which is a mistake and you’re correct to take that into account. I think it should give you a little bit more flexibility to handle it in simpler ways though.

You can get all sophisticated, come up with estimates of when you’re going to take the money out. What the tax liability is going to be. What your bracket is likely to be at that point, so what your net tax bill is going to be. Then apply discount rates to all that.

But I think it’s probably simpler just to say, hey, if I have $100,000 in a traditional IRA, my marginal tax bracket is 24%. For net-worth calculations, just stick a 24% of $100,000 liability in the tax liability column as a reserve for future tax liability and call it good.

It may be a missed estimate. But any number you put in there isn’t going to be exactly what turns out anyway. Just having some entry there so that you acknowledge the fact that this is out there. Then that way if some future planning opportunity comes up, you’re able to save on that. That’s a net bonus to you, your net worth will go up.

You reduce that reserve and that’ll be good news for you. You’re on the right path just thinking about it. Exactly how you deal with it is really up to you about how precise you want to be personally in the numbers that you come up with.

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