tax-adjusted wealth

[Beliavsky]

At my brokerage firm I have taxable, traditional IRA, and Roth IRA accounts. The taxable account has unrealized capital gains, and withdrawals from the traditional IRA will be taxed as income some day. It would be nice if brokerage firms estimated your tax-adjusted wealth, accounting for unpaid capital gains taxes and the different future treatment of traditional and Roth IRAs. One's spending and savings decisions should account for future tax liabilities.

Does any brokerage firm do this? Future tax rates are uncertain, but they are not going to be zero.

 

[JoeTaxpayer]

At my brokerage firm I have taxable, traditional IRA, and Roth IRA accounts. The taxable account has unrealized capital gains, and withdrawals from the traditional IRA will be taxed as income some day. It would be nice if brokerage firms estimated your tax-adjusted wealth, accounting for unpaid capital gains taxes and the different future treatment of traditional and Roth IRAs. One's spending and savings decisions should account for future tax liabilities.

Does any brokerage firm do this? Future tax rates are uncertain, but they are not going to be zero.

An interesting request. And a valuable tool. But tough to make accurate
without a lot of user input. For cap gains, are you in the zero long
term gain rate? For taxable income from the IRA, where to start, zero,
10%.... ? Is the social security phantom tax mixed in?

What would a broker's motivation be to offer such a tool?

 

[Beliavsky]

The investor could be asked to specify his capital gains tax rate and ordinary income tax rate. In the absence of those inputs some default values could be chosen. I keep almost almost all my money at one firm in part so that I can track my net worth more easily. Showing tax-adjusted wealth would help me do this.

 

[David S Meyers CFP]

An interesting request. And a valuable tool. But tough to make accurate
without a lot of user input. For cap gains, are you in the zero long
term gain rate? For taxable income from the IRA, where to start, zero,
10%.... ? Is the social security phantom tax mixed in?

Mutual funds have been offering an approximation of this in prospectus
for a while.

For example, from one of Vanguard's, they provide Average Annual Total
Returns in the
following ways:
Return before taxes
Return after taxes on distributions
Return after taxes on distributions and sale of fund.

To come up with these approximations, however, they use the following
rules to figure taxes:

Actual after-tax returns depend on your tax situation and may differ
from those shown in the preceding table. When after-tax returns are
calculated, it is assumed that the shareholder was in the highest
individual federal marginal income tax bracket at the time of each
distribution of income or capital gains or upon redemption. State and
local income taxes are not reflected in the calculations.

So, of course, those don't look like actual numbers for anyone in
particular. At most, they give you an idea of how tax-efficient a
given fund is (i.e., if return after taxes on distributions but before
sale of fund is close to return before taxes, it's efficient).

What would a broker's motivation be to offer such a tool?

The same as their motivations were for providing cost basis data to
clients before it was required by law - if the clients find it
convenient and helpful enough, and ask for it, and they feel like
providing it.

However, unlike the tax-adjusted returns for mutual funds, I don't
think "tax adjusted wealth" is going to be very useful, and don't think
many folks have asked for it.

[And, of course, the example above doesn't take into consideration a
variety of additional tax issues, such as the new ObamaCare net
investment income tax - 3.8% addition - nor things like phaseouts of
exemptions. It's simply too messy to be very accurate.]



--
David S. Meyers, CFP®
http://www.MeyersMoney.com
disclaimer: discussions in misc.invest.financial-plan are for
educational purposes only and should not be construed as financial
advice. For personal financial advice, please consult directly with a
professional.

 

[Beliavsky]

However, unlike the tax-adjusted returns for mutual funds, I don't

think "tax adjusted wealth" is going to be very useful, and don't think

many folks have asked for it.

A plausible spending rule in retirement is to consume X% of your savings each year. For a given level of wealth, you can safely consume more if there are fewer embedded taxes (few unrealized capital gains, for example) than if there are more. One reason few folks have asked for it is that they may not have thought about it.

 

[Tad Borek]

It would be nice if brokerage firms estimated your tax-adjusted
wealth, accounting for unpaid capital gains taxes and the different
future treatment of traditional and Roth IRAs.

Does any brokerage firm do this? Future tax rates are uncertain, but
they are not going to be zero.

Brokerage firms bend over backwards to avoid giving tangible tax advice
- it's written into the account agreement. And in this case, I think it
works better as a function in financial-planning software anyway, where
you can run different scenarios for using that wealth. The tax
adjustments you would make vary quite a bit depending on how and whether
specific accounts are turned to cash for consumption.

As an example, the capital gains rate in many cases might be 0% (sale in
a low tax bracket, gifting, inheritance), but you can see 35%+ now
including state & federal, higher if you factor in phase-outs and other
effects. Projecting terminal wealth at a 35% rate for long-term gains is
probably too pessimistic, 0% is too optimistic, and that's enough wiggle
room that the projection would be less than useful for most people. With
pre-tax IRAs where the tax rate could vary over a bigger range. So I
think this is best done in planning software that handles more scenarios
(or Excel).

-Tad