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  • Set Your Financial Records Right, Part 3

    (This is part 3 of the Set Your Records Right series.)

    Let’s turn to retirement accounts now. You are probably covered by at least one retirement plan and maybe several. Be sure to keep a file on each. Don’t forget about your IRAs, 401(k) plans, as well as any other employer sponsored plan for which you qualify. Each file should contain enrollment papers, statements, a list of beneficiary designations and contact information.

    Record keeping for IRAs can confuse even the savviest organizer. That’s because contributions to your IRA may have been made with before-tax or after-tax income, or a combination of the two. Now keep in mind, when you start withdrawing from your IRA, income tax will be due on those pre-tax contributions. So how do you figure out how much tax to pay?

    That is where your organized records come in. Your account statements will note whether your contributions were tax deferred or not. Be sure to keep them until you empty out the account. You should also keep a copy of Form 8606 in your IRA file. The IRS requires you to include this form with your return in any year you make a non-deductible contribution. Before filing your tax return, make a copy of Form 8606 and put a copy in your IRA file. It is a lot of paperwork to keep, I know, but the last thing you want to do is pay tax on income that’s already been taxed. Organized records will keep that from happening.

    Now, I will turn to the least complicated area I will be covering in this series — insurance. Insurance record keeping is pretty straightforward. Just make a file for each policy you hold containing your policy numbers, the issuing companies’ names, and your agents’ names. Be sure your files list those covered by the policy as well as any beneficiaries. Imagine the ease of filing a claim with all of these details at your fingertips.

    If you own a home, you know how much paperwork it can generate. But home-related records are important for both tax and insurance purposes. To get your home-related documents under control, begin by preparing a file on your home’s purchase. Include sales agreements, closing documents, and copies of mortgages and appraisals.

    Another file should contain an inventory of your belongings. Be sure to include brands, model and serial numbers, purchase prices and replacement costs of your big-ticket items. Photographs or video recordings of your possessions are valuable tools for insurance purposes. It’s important to keep a copy of your inventory list, photos and video in your safe deposit box in case your home is damaged or burglarized.

    Your third home file is for all documents relating to home improvements. According to IRS rules, work that you do to your home that increases its value is a capital improvement and will raise your home’s cost basis. It works pretty much in the same way as the mutual fund example I gave you earlier. But instead of reinvesting dividends, you’re making investments in the value of your home.

    Let’s say you bought a home for $100,000 and spent $50,000 updating the kitchen and bathrooms and putting on a new roof. Your cost basis would then be $150,000 – the $100,000 purchase price plus the costs of renovation. If you later sell the home for $200,000, your gain would be $50,000 – that is the $200,000 sales price minus your adjusted cost basis of $150,000.

    Now some people might tell you that keeping these records is a waste of time these days because gains of up to $250,000, or double that amount if you are married, are no longer subject to tax. But there are two reasons not to listen. First, if you own your home for a long time, especially in a period of rising real estate values, it’s entirely possible that your gain could surpass this threshold. And second, Congress could change the rules at any time. Keep your records and receipts for at least three years after you sell the property and you’ll be prepared for either scenario.

    We’ll finish this series in the next post. Stay tuned!

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