Staying Organized

WHAT TAX INFORMATION should you file away—and what other steps should you take to keep your finances from sprawling out of control? Here are six pointers:

  • Keep seven years of tax returns, including supporting materials. The IRS has three years to audit your tax return or six years if it suspects substantial underreporting of income. What if you have been playing fast and loose with your taxes? You probably shouldn’t throw anything away.
  • Keep cost-basis information for assets held in your taxable account. This should include how much you paid for your house, plus the cost of any subsequent home improvements. You may be able to add those improvements to your home’s cost basis when you sell and thereby reduce any taxable gain. You should probably also keep records of how much you paid for individual investments, unless your financial firms provide it. Mutual funds are now required to provide cost-basis information for funds bought in 2012 or later, and many firms provide information for funds purchased prior to that year.
  • Keep a record of all nondeductible IRA contributions—and make sure your heirs know where to find the details. If you bequeath your IRA, your beneficiaries won’t have to pay taxes when they withdraw those nondeductible contributions.
  • Keep the latest insurance policy statements you were sent and throw away old versions, unless you have a claim outstanding that hasn’t been settled.
  • Avoid opening an excessive number of financial accounts or buying an excessive number of investments. Many folks engage in “naive diversification,” assuming they’re safer if they have accounts at multiple brokerage firms, mutual fund companies and banks, and if they use multiple financial advisors. They also feel safer owning multiple mutual funds, even if these funds invest in the same part of the market. While such naive diversification may marginally reduce risk, it’s typically counter-productive, resulting in unnecessary duplication, higher investment costs and paperwork hassles, including at tax time.
  • Create a consolidated list of all usernames and passwords, and put it somewhere safe. Make sure trusted family members know where to find it.

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