3 Reasons Why You Can't Trust Your Personal Balance Sheet Do you know what your net worth would be if you subtracted taxes, changes in the value of your retirement account or even yourself (i.e., you died)?

By Pamela Yellen

Opinions expressed by Entrepreneur contributors are their own.

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If you're like most people, you may think you have a general idea about your balance sheet. You may know, for instance, how much you owe on your mortgage, car payments and other loans and debts. And you may know approximately how much equity you have in your home, the cash you have in savings and the value of your retirement accounts. Or do you?

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While it's easy to see the balance on your mortgage and how much cash you have in savings, you face a much trickier proposition getting a handle on the real value of your retirement accounts.

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If, for instance, you have most of your retirement savings in traditional government-sponsored plans such as 401(k)s and IRAs, you have to consider how future taxes on those funds will cut into your income. And, since such plans are invested in stocks, bonds and mutual funds, their value can be depleted if the markets tank just as you're preparing to tap into them.

When, in February, the stock market tumbled more than 1,000 points, then finally regained ground, some analysts called that event "a long-delayed but otherwise harmless 10 percent correction." Others warned it might be a sign of more volatility to come.

Of course no one knows what the future holds. But you can be sure that February's "correction" is prompting countless Americans to check their 401(k) and IRA statements closely to get a handle on their value -- at least on paper.

Unfortunately, many folks don't distinguish between paper wealth and real wealth. And that difference can distort your picture of your own net worth.

Most financial planners suggest you create a balance sheet at least once a year to track your progress toward your financial goals. A balance sheet shows you at a glance what you own, what you owe and the difference between the two. If you owe more than you own, your net worth is a negative number, and that's an early indication of possible financial problems or bankruptcy in your future.

It's easy to create a balance sheet using personal finance software packages that are widely available. But, as you plug in the numbers, keep in mind that the balance sheet is probably not telling you the whole story. In fact, when it comes to calculating the net worth of retirement accounts, a balance sheet can be extremely misleading -- and not in your favor.

Consider how these three factors could affect your bottom line.

1. A hidden tax hit. If you have $300,000 in an IRA, 401(k) or other traditional retirement account (other than a Roth IRA), those accounts would be listed as a $300,000 asset, but you will face significant income tax liability. Whenever you take money out of your traditional retirement account, you'll owe income tax on every dollar you remove. For a taxpayer in the 25 percent bracket, that amounts to $75,000 you have to pay Uncle Sam, and $225,000 you get to keep.

2. Estate impact. If you die before you've withdrawn all the money from your traditional retirement account, what's left will go to your beneficiaries -- and Uncle Sam will look to them to pay the income tax you owe. Your family members may also have to pay estate tax on any of your retirement money they inherit.

3. Retirement account values are subject to drastic change. A balance sheet shows the estimated worth of your assets if you could sell them today at fair market value. It does not tell you what they would be worth if the market tanks, or even if it soars.

We've had two market drops of 50 percent or more since 2000. For that reason, if you have your retirement savings in in a traditional IRA, 401(k) plan, 403(b) plan, Thrift saving account or 457 plan, you should take that number on your statement with a big grain of salt.

What if, on the other hand, you had $300,000 cash value in a properly designed dividend-paying whole life insurance policy? Under this scenario, you could arrange your cash value withdrawals so there is no income tax due, under current law. So instead of paying 25 percent to Uncle Sam, you keep the entire $300,000.

And that's not the only tax advantage to this strategy ...

If you have all your savings in traditional retirement accounts and die before spending it, your family will have to pay income tax on whatever they inherit from those accounts. But if that cash value is in a life insurance policy, your beneficiaries will receive the death benefit of the policy -- which could conceivably be many times greater than the cash value - with no income taxes due, under current law.

Related: 3 Retirement Pitfalls and How to Address Them

So, the next time you tally up your personal balance sheet, consider how income taxes, estate considerations and market volatility take a bite out or your personal wealth --- and how you can devise a savings strategy to keep more of your hard-earned money.

Wavy Line
Pamela Yellen

Financial security expert

Pamela Yellen is a financial security expert, a two-time NY Times best-selling author and President of Bank On Yourself. Pamela's latest book is "Rescue Your Retirement: Five Wealth-Killing Traps of 401(k)s, IRAs and Roth Plans – and How to Avoid Them."

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