Gather Little by Little

I received in a great question from a new reader yesterday, and frankly it’s one I struggled with a bit when I first put my Net Worth statement together:

I just discovered your site, and it looks as if it’s going to be very useful to
me. There is just one thing I need to clarify: how do you count a 401K towards your net worth?

I have a 401K of about $41,000. I also have a Roth IRA that’s just over $10,000.

I assumed that I could figure my current net worth based on what money I’d be left with after taking it all out of my Roth IRA and my 401K. Wouldn’t I end up with about 60%? If so, in my case that would be 60% of between $51,000 and $52,000.

Could you please tell me how much of my 401K and my Roth IRA I should count towards my net worth?

Our reader is right on track. How to include your retirement accounts in your net worth is a bit of a debated topic, but in my opinion very straight forward. Let’s dive in a little deeper and understand how to include your retirement account in your Net Worth…

Including a retirement account into your net worth statement is relatively easy. If you need refresher on how to create a Net Worth statement, head over to my How To Determine and Track Your Net Worth article. Now to answer the question:

As An Asset

Under your assets you will list the present vested value of your 401k, Roth, or IRA accounts. In other words, you list the money that is currently yours. If you aren’t fully vested, you will need to calculate the value that is actually yours.

It might seem logical to include the future or estimated value, but doing so is incorrect. You shouldn’t include money that you don’t have as an asset in your net worth as it will incorrectly convey the your actual present day worth. Losing your job, becoming disabled, or even deciding to make a career change can and most likely will impact the future value of your retirement account.

Using our readers numbers, the retirement account section of your Net Worth Statement would look as follows:

Retirement Accounts:
401k $41,000
Roth IRA $10,000
——-
Sub-Total $51,000

As A Liability

For your 401k, you will need to list the estimated taxes you will have to pay upon removing money from your account. This is a difficult figure to estimate due to changing tax rates, your income, whether you itemize or not, etc. While I’ll most likely be in a lower tax bracket while in retirement, I prefer to stay on the conservative side and thus use my current tax bracket. Getting the right number here is really difficult, so don’t get too hung up on it. Just pick a number that makes you feel comfortable.

Roth IRAs are different, in that taxes are pulled out prior to the money being placed into the account. As a result, you don’t have to pay taxes when the money is removed and hence showing a tax liability is not required.

If you have 401k loans outstanding (which I don’t recommend) you need to list these under liabilities as well. List each loan and it’s associated payoff amount. Remember, if you leave your company for any reason, the loans are due in full within 30-60 days or they will be treated as an early withdrawal (i.e. you pay taxes and get hit with a 10% early withdrawal penalty).

Again, using our readers numbers, the Liabilities section of your Net Worth Statement would look as follows (using a 22% tax bracket for example purposes):

Retirement Accounts:
401k Taxes $9,020

Based on these numbers, our readers actual 401k value as shown on a Net Worth Statement would be $41,980.

Have a question? Think you know the answer but you’re not sure, feel free to contact me or make a comment. Have additional advice or suggestions for our reader, please add your thoughts in the comments section!