BOSTON – Now that the chore of your tax return is done, it's time for another spring ritual — cleaning your mutual fund files.
Done properly, a little effort now will not only make it so that future returns are less taxing on your time and energy, but also will make it so that you have better control over your portfolio.
Most people keep too much information, cluttering their files with redundant papers rather than refining their filing system to keep only what is necessary and current. The easiest way to avoid potential problems stemming from cluttered records, experts suggest, is purging your fund files of every unnecessary document.
From a tax standpoint you need a record of every purchase or sale, including dividends and capital gains that you rolled back into any fund you hold in a taxable account. That doesn't mean you must keep every piece of information your fund firm sends, however, especially when the information comes to you again and again and again.
If you invest in a fund every month, for example, you most likely receive a statement confirming each transaction. Each statement shows all of your purchases from the year, so that your April confirmation shows your deposits from January, February and March too. You may also receive a quarterly account statement in addition to the confirmations.
Ultimately, the accounting you get from the fund at the end of the year shows all of your transactions, rendering all of the previous statements from the year obsolete from a tax standpoint. By capturing your final statement from each year, you can destroy the interim ones and still have all of the information needed to calculate your cost basis in the fund no matter how far into the future you sell.
Many fund firms also include the cost basis for each investor — typically your average cost per share — on statements. This also reduces the need to keep paperwork, although long-time investors will want to make sure the data includes all purchases (and not just those made since the fund firm started making the calculation).
"The December statement is sufficient to establish your records, and all of the rest is just clutter," says Frank Degen, president of the National Association of Enrolled Agents. (Enrolled agents are federally authorized tax practitioners.) "The dividend reinvestments are what most people find problematic, but if you have the final statement of the year for a mutual fund — for as long as you own the fund — you've got everything you need to complete your tax return accurately."
If you do not have complete records contact your fund company and see if it can help you reconstruct the missing paperwork.
No need to hang on forever
When you sell a mutual fund, hang on to the paperwork used to establish your costs for three years after the return is filed; that means you'll be able to pitch the records of any fund sold in 2005 in 2009 (since you filed the return for last year in 2006). There is no reason to hang on to statements from funds you held in the 1980s but sold before the turn of the millennium. They may be part of your personal history but they have no tax value.
While you are cleaning up the files, however, don't just focus on statements. Get rid of old mailing envelopes and deposit tickets. Many fund firms — especially smaller ones — have changed transfer agents in recent years or altered their computer systems and created new account numbers; you do not want to send your next deposit or IRA contribution to the wrong place or to an account number that's wrong. Not only is it frustrating, but you're out of the market while the issue gets sorted and corrected, which can take weeks.
Purge your files of old prospectuses too, but keep the latest version of the prospectus and annual report. The prospectus is a legal document, effectively your contract with the fund firm, and you are operating under the current version; you can't live under the old rules just because you don't have the new ones in your files.
Finally, review your expectations for holding the fund. The first thing you should put in your fund file — before you ever have an account statement — is a list of the reasons why you bought the fund and what you expected to get from it. Whenever you have concerns about a fund's ability to perform, reviewing that list is a good way to see what conditions have changed to create your doubts.
If you do not have a list of reasons for why you own a fund and want to continue to hold it, make one. If you can't come up with good reasons, that's a sign that you need to do some spring cleaning of your portfolio and not just your filing system.
Copyright (c) 2006 MarketWatch, Inc.