Can an IRA Be Calculated in Net Worth?

Your net worth is an indication of how well, financially, you are doing. Your net worth is the sum of all of your assets less all of your liabilities. Knowing this number may help you develop a financial plan and determine whether you need to engage in more advanced strategies later in life, like estate planning.

Process

Your Individual Retirement Account is part of your asset holdings. Therefore, you should include it in your net worth calculation. Even though you can't spend this money until your retirement, it still represents money you have in your control. Add all of the investments you own, including your IRA. Next, subtract all of your future liabilities and current debts. The result is your net worth.

Benefit

IRAs are investment accounts which typically allows you to contribute money on a tax-deductible or pretax basis. Some IRAs allow you to make contributions on an after-tax basis in exchange for tax-free income. Regardless, the money in your IRA allows you to grow your net worth larger than you otherwise would be able to because of this tax benefit.

Effect

When you withdraw money from your traditional IRA, your net worth is negatively impacted. While the IRA balance does give you a higher net worth while the money is in the account, it could be deceiving, since taxes haven't yet been applies to the account. Traditional IRAs may leave you thinking that you are worth more than you actually are when you retire. Roth IRAs don't pose the same issue since the account is already adjusted for taxes.

Consideration

When relying on your IRA as part of your net worth, you may wish to subtract the effect of taxes from your IRA. This will give you a more complete picture of how much you're really worth. While you haven't yet lost this money, you will eventually and more accurately calculating this number may better help you make plans for your retirement and estate later on in life.

References

• New Jersey Agricultural Experiment Station: Net-Worth Calculation Worksheet
• "Practicing Financial Planning for Professionals"; Sid Mittra, et al.; 2007