Finding Your True Net Worth
Knowing your net worth is an essential step in fine-tuning your financial plan. It can help you to more accurately decide how to invest, how quickly to pay off debt and how to plan your estate and other financial matters, such as whether to lend money to family members.
Calculating your net worth may seem basic at first glance: add up assets and subtract liabilities. But the net worth equation is a bit more complicated. Costs such as real estate brokerage commissions, taxes and other expenses triggered by liquidating non-cash assets can affect the final figure. As a result, always remember to factor in these expenses so that you don't overestimate your true net worth, which could potentially lead to ill-informed financial decisions.
When you set about determining your net worth, consider what it would cost to turn the following assets into cash:
Investment securities. Drawing on assets held in taxable accounts or conventional retirement accounts triggers federal and state income taxes. Sales from Roth IRAs or Roth 401(k) accounts do not trigger taxes.
For example, say you hold investments worth $1 million in taxable brokerage accounts, which includes $300,000 in investment profits. If you've held these securities for more than one year, selling them would incur federal long-term capital gains taxes of 15% for a federal tax bill of $45,000. (Selling securities you've held one year or less will trigger potentially higher short-term rates.) State taxes might cost you another $15,000 or so. As a result, the true value of those investments might be around $940,000 - not $1 million.
Likewise, withdrawls from conventional IRAs and 401(k) accounts incur income tax - and in most cases they'll trigger a 10% federal penalty for investors who are younger than 59-1/2 (a state penalty may also apply).
Real estate. An accurate picture of your real estate assets requires more than an estimate of your property's current market value. You also must account for the effects of brokerage commissions and taxes. Brokers typically charge up to 6% to help sell buildings, and may charge up to 10% for sales of undeveloped land.
You can earn a tax-free capital gain of up to $250,000 when you sell your primary residence if you're a single homeowner and have lived there for at least two out of the last five years ($500,000 if you're married). Be sure to subtract any potential capital gains taxes from your real estate values before calculating your net worth. Sales of non-residence properties are subject to the same capital gains taxes as a residence.
Personal property. It's easy to overestimate the value of personal property such as automobiles, boats, jewelry, furniture or art. For an accurate picture of the value of cars or trucks, visit the websites for Kelley Blue Book (www.kbb.com) or the National Auto Dealers Association (www.nada.com). NADA also offers boat appraisals at www.boats.com. Consult appraisers to value other items, and be sure to subtract any costs that would be necessary to sell them.
Effective financial planning requires an accurate picture of your net worth. Factoring in the costs of liquidating non-cash assets can help you zero in on the true value, giving you the information you need to make the right decisions for managing your wealth. And don't forget to consult with a tax advisor for any questions you may have.
* * * * *
Calculating your net worth may seem basic at first glance: add up assets and subtract liabilities. But the net worth equation is a bit more complicated. Costs such as real estate brokerage commissions, taxes and other expenses triggered by liquidating non-cash assets can affect the final figure. As a result, always remember to factor in these expenses so that you don't overestimate your true net worth, which could potentially lead to ill-informed financial decisions.
When you set about determining your net worth, consider what it would cost to turn the following assets into cash:
Investment securities. Drawing on assets held in taxable accounts or conventional retirement accounts triggers federal and state income taxes. Sales from Roth IRAs or Roth 401(k) accounts do not trigger taxes.
For example, say you hold investments worth $1 million in taxable brokerage accounts, which includes $300,000 in investment profits. If you've held these securities for more than one year, selling them would incur federal long-term capital gains taxes of 15% for a federal tax bill of $45,000. (Selling securities you've held one year or less will trigger potentially higher short-term rates.) State taxes might cost you another $15,000 or so. As a result, the true value of those investments might be around $940,000 - not $1 million.
Likewise, withdrawls from conventional IRAs and 401(k) accounts incur income tax - and in most cases they'll trigger a 10% federal penalty for investors who are younger than 59-1/2 (a state penalty may also apply).
Real estate. An accurate picture of your real estate assets requires more than an estimate of your property's current market value. You also must account for the effects of brokerage commissions and taxes. Brokers typically charge up to 6% to help sell buildings, and may charge up to 10% for sales of undeveloped land.
You can earn a tax-free capital gain of up to $250,000 when you sell your primary residence if you're a single homeowner and have lived there for at least two out of the last five years ($500,000 if you're married). Be sure to subtract any potential capital gains taxes from your real estate values before calculating your net worth. Sales of non-residence properties are subject to the same capital gains taxes as a residence.
Personal property. It's easy to overestimate the value of personal property such as automobiles, boats, jewelry, furniture or art. For an accurate picture of the value of cars or trucks, visit the websites for Kelley Blue Book (www.kbb.com) or the National Auto Dealers Association (www.nada.com). NADA also offers boat appraisals at www.boats.com. Consult appraisers to value other items, and be sure to subtract any costs that would be necessary to sell them.
Effective financial planning requires an accurate picture of your net worth. Factoring in the costs of liquidating non-cash assets can help you zero in on the true value, giving you the information you need to make the right decisions for managing your wealth. And don't forget to consult with a tax advisor for any questions you may have.
* * * * *
posted by Bob Moser at
3:52 PM
0 Comments:
Post a Comment
<< Home