Should I Treat Roth and Traditional Assets Equally in My Net Worth Statement?

Let’s go ahead and move on to Jason’s question. He says, “When looking at our year-end net worth update, should we value Roth and traditional dollars the same way, or is there a Money Guy Show formula I missed? 95% of my retirement assets are in WTH, so should he be thinking about this in any particular way in your opinion?”

So, let me explain why he’s asking this question because we get this question a lot. Then I want you to explain the answer that you and I have adopted. The why is someone says, “Well, hey, if I have $100 in Roth saved and I have $100 in a traditional IRA saved, those are not the same. That $100 in Roth I can pull out tomorrow, and it’s mine. It’s really worth $100. That $100 pre-tax is 100 minus what I have to pay, whatever I have to pay in taxes. So, $100 and $100 are not equal. There must be some differentiation here. How can I normalize that? How can I account for that on my net worth statement?”

So, the question was, “Well, do I count them the same?” I think there might be an easier way, Brian, to figure out how to account if you’re trying to put together a conservative net worth statement.

Yeah, well, by the way, I have no problem if you’re brand new to creating a net worth statement. First of all, we have some free tools that let you just go download a free net worth template. We have those sitting out there, go check it out at money.com resource. But if you want to accelerate this, we actually have a tool, a net worth tool that you can fill out, see a dashboard, track the changes year-over-year. It’s really powerful. If you go to learn.moneyguy.com, we have that tool. And by the way, we’ve also freshly updated that to where now it goes all the way out to what 2035. It goes a long way into the future. So, we’re hopefully going to have an app before that thing runs out of time on the next one. But we have future-proofed it in a lot of ways. I would encourage you to go check that out. Have I said no? Keep going, you’re rolling. I love it.

But here’s the thing that I want to, if you’re brand new to net worth, you don’t have to get caught up in this minutia or detail because this really is getting into financial mutant territory. I just want you to start practicing the behavior of recording what you’ve got going on and the changes. But I will tell you, because I always say when you start doing a net worth statement, it is like a baby that turns into a child that then turns into a teenager. So, it’s not uncommon that as you’re nurturing it early on, I want to keep it as simple as you’re taking those steps forward. But you will find about the time that your net worth has turned into a teenager and you’re starting to see that, man, every month there’s a good month in the investment marketplace. It’s now replacing a month of work or maybe even a quarter of work. You’re starting to see some pretty exciting stuff happen. You’re going to then want to go beyond basic, and you will start thinking like Jason is, where you go, ‘Man, a Roth IRA is just not the same thing as a traditional IRA or my pre-tax 401k or my matching money for my 401k. How do I count?’ And that’s what Bo was alluding to. There’s nothing wrong with, on the liability section of your net worth, putting a line for what’s called deferred taxes.

Yep, I do this on my own. To the detriment that I’ve had to learn to, whenever I send my net worth statement over to bankers, not to take it off because they get so confused. They’re like, ‘What is this huge liability?’ I’m like, ‘Oh, that huge liability, um, that’s titled deferred taxes. It’s our favorite taxing uncle that I just want to keep my net worth really, you know, kind of where I know really what it is. You know, if I had to turn every dollar into something I could tangibly touch, this is what uncle would want to take from me to do that because tax-deferred money is going to be taxed at ordinary income taxes. Roth money is not going to be taxed, some of the after-tax and other things if I’ve got appreciation on them. You know, because I bought the right index fund or other thing, you’re going to pay long-term capital gains rates on that. So I took all that into account, and on my net worth statement, I do have a line for deferred taxes. You can calculate that out. Nothing wrong with putting that on there, Jason, if you want to be super conservative. It also allows you to kind of keep, um, you don’t want people, you don’t want to think about things getting out, and it’s not actually usable net worth because you haven’t paid the taxes. It’s the same way that when I, and I get people all worked up on this on my primary residence, I do an accounting technique of lower of cost or market. Is that I put my primary residence at cost plus improvements. I don’t do market because I just don’t want my net worth being skewed by seven figures because my house is appreciated. Because that’s not actually, I have to sell that house. There’s nothing wrong if you put your house at market value. I just don’t want you using that to make you feel like you’re really doing a great job of building wealth when, no, you just got lucky that you bought your house at the right time. Um, and if you’re raising your family there, you might still need to be saving in the 401k. You might still need to be funding the Roth IRA. Let’s make sure you’re building assets and you’re well-rounded in all aspects of your financial life. For more information, check out our free resources.