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?
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:
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).
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.]
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.
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).
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