Which Records to Toss

Kiplinger's Personal Finance Magazine, Feb, 1999 by Kimberly Lankford, Sean O'Neill, Margaret Ringer

Go for it--you probably don't need to keep all those flies as long as you think.

Now that it's 1999, I'd like to get rid of some of my old files and make room for this year's onslaught. How long should I keep old bank records, checks, credit card statements, tax returns and so on?

--ROBERT BOEDIGHEIMER, Marshall, Minn.

Not nearly as long as you'd expect. Papers people keep out of habit often do nothing but take up space in their file cabinets, says Barbara Hemphill, a professional organizer and author of Taming the Paper Tiger at Home (Kiplinger Books, $14.95). Here's what you can toss:

* Bank records. Chuck ATM receipts after your bank statement arrives and you've made sure that everything matches up. The same goes for canceled checks and credit card receipts--unless you need them for tax purposes (such as for charitable contributions and business expenses), warranties or home-improvement records.

* Tax records. Tax returns provide a fascinating financial history, but you can probably toss supporting records after three years--you're usually safe from being audited after three years from when the taxes were due, unless you forgot to report a big chunk of your income. If you're self-employed or have supplementary sources of income, consider hanging on to supporting records for six years.

* Mutual funds. When you sell shares, you will need to know how much you originally paid-for the shares and the amount of dividends and capital-gain distributions you have reinvested. Chuck all but your first and most recent transaction reports and prospectuses. Also keep the year-end cumulative report.

* Home-improvement records. Thanks to new tax laws that allow most homeowners to keep home profits tax-free, you probably don't need to account for home-improvement costs when you sell your home. But you'll still need to keep those records if you plan to rent out part of your home or convert some portion of it into a home office. Likewise, if you think you will live in your home for less than two years or earn a profit of more than $250,000 ($500,000 if you're married) when you sell it, keep the records. Regardless, it doesn't hurt to keep the records until you sell--you may want to show potential buyers how much you've invested in the home.

* Credit card statements. Throw these away as soon as your payment is posted on the next month's bill. But keep receipts you may need in a tax audit to prove, for example, that an Office Depot charge was for office supplies and not for video games.

* Utility receipts. Unless you're deducting your phone or electricity charges as home-office expenses, toss your utility receipts when you pay the bill. The stubs don't prove you paid the bills, just that you received them.

DISAPPEARING FUNDS

I read that Robertson Stephens liquidated its emerging-markets fund. Is that because of the poor performance of emerging markets? What is happening to investors' money?

--NAME WITHHELD

Robertson Stephens shuttered its Developing Countries fund on October 30 and gave investors their money back. "In the emerging-markets area, investors are being advised to be patient," says Scott Cooley, a stock-fund analyst for Morningstar, the mutual fund tracking service. "But when the funds of some companies aren't making money, they're pretty quick to pull the plug." Developing Countries, for example, had a 12-month return of-52% through September 30 and only $7.2 million left in assets. SteinRoe Emerging Markets was another of several emerging-markets funds that went under last year.

When a fund liquidates, investors have to pay taxes on any capital gains (more likely, they'll have losses). When a fund merges, the shares roll into another fund, usually without creating extra taxes for the investor.

PAY OFF THE 401(K) LOAN FASTER?

I borrowed $15,000 from my 401(k) to purchase my first home. I'm currently paying the loan back at 9.5% interest over seven years and continuing to max out my pretax contributions. Should I try to repay the loan sooner and decrease my pretax contributions until it's paid off? My employer matches 3%.

--NAME WITHHELD

First, make sure you're contributing at least enough to get the employer match. Then, if you have few cash reserves and want to be on the safe side, repay the loan as quickly as you can. The reason: Most 401(k) plans require you to repay the loan if you leave your job. If you can't pay it back, the loan will be considered a withdrawal and taxed at your top bracket--even if the money is long gone. You'll also owe a 10% early-withdrawal penalty on the money if you leave your job before age 55. And your 401(k) loan is subtracted directly from your account, so you have less money working for you while the loan is outstanding, even though the interest gets added to your account.

On the other hand, when you contribute less than the maximum annual amount to your 401(k), you lose the opportunity to make up the difference later. For example, if your annual maximum is $10,000 but you contribute only $2,000, you can't go back and add the extra $8,000. If possible, temporarily discontinue other investments that aren't tax-deferred so you can contribute more to the 401(k) and quickly pay off the loan.