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Do 401k’s Investors Possess A False Sense of Net Worth?

Your house might be worth one million dollars, but you don’t factor that amount into your net worth calculation. Why? Because, for example, you might have a $350,000 mortgage encumbering that million dollar property.

Contrast that to an investor nearing retirement with a stock portfolio worth one million dollars and a 401k worth one million dollar. While the investor would be quick to value his home net of the mortgage, too frequently no distinction is made between the absolute value of the stock portfolio and the 401k plan. A portion of the 401k is encumbered by the potential taxes owed on distributions.   If the investor lives in California, they will probably owe about 35% of the value of the 401k to the tax authorities.   If you are keeping score at home, this means the 401k’s real value is only $650,000 while the stock portfolio is worth a true million dollars.

We believe there is investment psychology involved here, from projecting your real net worth, to your real future cash flow, to your decision on which account to withdraw funds from first?? Do you first take money out of your 401k/IRA or do you liquidate some of your stock portfolio?   If you make a mistake, you could forfeit some of the best tax benefits around. That’s where we come in. We don’t just steward your investments, we strive to maximize your after-tax cash flow.

Lou Barberini, CPA/PFS| Director Retirement Tax Strategies

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