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I'm saving for retirement in a 401(k) and IRA account invested in mutual funds. How can I most efficiently keep track of the paperwork -- cost basis, dividend payments, etc. -- so I can effectively manage my portfolio over the next 30-plus years? Keeping track of the cost basis and dividend payments until retirement sounds daunting!
-- Kristin Edeen, Danville, CA
Daunting is the polite word for describing the challenge of keeping track of our investments. In reality, I consider this part of investing a big...let's just leave it daunting.
Still, however we may feel about this task, it's necessary, especially if we want to monitor the progress of our investments and maintain a portfolio suited to our needs.
So what, exactly, do you need to do?
Track your statements
Well, generally you want to maintain enough documentation so that you can reconstruct, if necessary, how much paid for your investments, including reinvested dividends and capital gains, net of any commissions and transaction costs.
If the investment firm that administers your 401(k) or your IRA provides you with an annual statement (either in paper or electronic form) that lists all your investments as well as the price you paid each time you invested new money or reinvested gains, saving that statement each year should suffice for record-keeping purposes.
If you don't get such an annual statement -- or it doesn't provide enough detail -- then hold onto the quarterly or monthly statements. The idea is to be able to determine what you paid for your investments without being drowned in paper, or even electronic files.
Don't worry about "basis"
I should point out, however, that when it comes to investments you hold in 401(k)s and IRAs, it's unlikely that you will ever have to figure out your "basis" -- that is, the amount you paid for an investment in after-tax dollars (plus any commissions and fees), which is subtracted from the sales price to determine whether you have a taxable gain or deductible loss.
Why? Because if you have contributed only pre-tax dollars to your 401(k) or made only tax-deductible contributions to your IRA, you don't really have a "basis."
You bought your investments with money that has yet to be taxed. Which means that all the money in your 401(k) and IRA will be subject to tax when you withdraw it, regardless of whether your investments have earned a gain or suffered a loss.
The only way "basis" would come into play with a 401(k) or IRA is if you made after-tax contributions to your 401(k), or nondeductible contributions to a traditional IRA or invested in a Roth IRA (which you can do only with after-tax dollars).
It would then at least be possible for you to have a tax-deductible loss, in which case you would need information about the original cost of the shares you acquired with after-tax or nondeductible dollars to prove that loss.
But as a practical matter, it's not very likely if you've been investing in a 401(k) or IRA for a long time. (For details on what you would need to do to deduct such a loss, check out IRS Publication 590: Individual Retirement Arrangements.
If you've made pre-tax contributions to a 401(k) or nondeductible contributions to an IRA, there's another reason you'll want to keep records of the original value of those contributions. Since those contributions have already been taxed, you don't want to pay tax on them again. (IRS Publication 590 explains how to figure out how much of a withdrawal is taxable and how much isn't in such cases).
Aside from administrative and tax purposes, there's another reason you to want to track the value of your 401(k) and IRA: you want to see how your investments are performing and you want to be sure your portfolio isn't becoming lopsided as some investments outperform others.
Savings annual statements isn't the best way to do this kind of monitoring, however.
Rather, this kind of task is best done electronically, either with software or an online service that can track your portfolio and show how individual components are doing. Many 401(k) plans now offer some type of tracking service online that not only calculates the return for your portfolio overall and individual investments, but also shows how your holdings break down by asset class, or different types of stocks and bonds.
If your plan doesn't offer such a service, you can find one online. If you go to the investment tools section of T. Rowe Price's Web site, for example, you'll find a version of Morningstar's Portfolio Tracker where you can enter information about your holdings (assuming they're publicly traded stocks or mutual funds).
By going to the Portfolio X-ray too, you can see how your portfolio breaks down in terms of stocks vs. bonds as well as different types of stocks and bonds.
By updating this information periodically -- say quarterly or even once a year -- you can see how your 401(k) and IRA investments are faring, and determine whether you're still on track to a comfortable retirement.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."