When it comes to your finances, organizing papers and documents can be a daunting task.
There are plenty of financial organization tips you’ve probably already heard to help you get started, but Jennifer and Mike are chatting about some of the tips you probably haven’t heard!
Want to chat more? We’re always here!
Video Transcript – Financial Organization
JENNIFER
Hello and welcome to our February blog, vlog, newsletter, all of the above. Right?
MIKE
Discussion. Yeah.
JENNIFER
Discussion. Our topic this month is being organized, which sort of after the holiday rush, people start to think about getting organized and we see it even in the industry publications a bit more. We started to go down this road of saying, “Well, you should keep certain records,” and you should, but most of them you know. Most of them, like copies of your will and trust documents, if you have them, should be easy to find. Another kind of easy one that people might not think about is your utility bills or all of your regular bills, in case somebody needed to step in for you, they could easily find them. I have some personal experience where that was not an easy thing. But we really wanted to dig into some of the things that are less obvious. So, we have a few different highlights that are somewhat related and somewhat not, depending on which ones they are.
Tip #1 – Keeping your tax returns
JENNIFER
But the first one is, how long should you keep your tax returns? The general knowledge is three years. But some states require a longer holding period. For example, California asks for, I think, five years. But if you ever get audited, you really need 6 to 7 years of history, so I personally keep 7 years of tax returns and then I shred, you know, every year, the 8 year old one. That just makes sure you are covered. There’s also some other ways it comes in handy, and we’ll touch on that, actually, when we talk about some other forms that go along with your tax return.
MIKE
Yeah.
JENNIFER
So, even though – so, people that I’ve heard recently tend to shred them after a year or two, and I would really kind of hold on a little bit longer, just so you have them at your fingertips, because sometimes it comes in handy for reasons other than being audited.
MIKE
Yeah. And even the keeping of those tax returns. You know, a lot of – such a huge portion of people are filing on Turbo Tax. They keep, you know, a lot of them. So, just having your login, having that access. So, it doesn’t necessarily mean, you know, file it.
JENNIFER
Paper.
MIKE
But just know that it exists somewhere.
JENNIFER
Yeah.
MIKE
You could almost audit yourself with something like tax returns and say, “Well, could I find my 2018 taxes right now?” Maybe that’s a good test, just jumping in and seeing, does that exist anywhere in your household?
JENNIFER
Yeah.
MIKE
Or your computer? Somewhere.
JENNIFER
And that can get weird too because when you upgrade or change computers, sometimes your tax returns are on old computers.
MIKE
Yeah. If it’s saved on a hard drive. Yep.
JENNIFER
I’ve seen many people run into that too. So, it’s actually better, if you can, if you use some sort of cloud storage to keep them all together in a folder.
MIKE
Yeah.
Tip #2 – Holding onto old W-2’s
MIKE
So, number two is – oh, yeah. So, W-2s. This is an interesting one. These are, again, the things that you don’t naturally think about until you have an issue and it comes up. So, we had a client, a specific story with this one, with W-2s, is keeping old W2s for Social Security purposes. And this was a just – they weren’t filing but for some reason were in the Social Security database and went into the wage history and just saw that they had missing years.
JENNIFER
Yeah.
MIKE
There were years where their –
JENNIFER
Several missing years.
MIKE
And I don’t remember what it was or how that could possibly happen, but I mean, we hear stories.
JENNIFER
It happens. Yeah.
MIKE
You know, Social Security, in some cases, is maybe not the most organized organization.
JENNIFER
It’s big.
MIKE
But if you have that data or information, you can reconcile that. So, keeping W-2s from historical information just to be able to prove that, “Hey, I did earn money and I did pay into Social Security for these years.”
JENNIFER
So, every year you have a zero earning impacts your future benefits. So, if you’ve actually worked those years, you definitely want credit for it.
MIKE
Yeah.
JENNIFER
Because it will increase your ultimate payout.
MIKE
Yeah.
JENNIFER
So, it was difficult, but she was able to fix it. But if you have all of your W-2s, which I don’t because I didn’t know this back in the day either, it will be handy for you at some point. And it’s easy to keep, as well.
Tip #3 – Investing in your Health Savings Account (HSA)
JENNIFER
So, this one’s probably going to have the most discssion, which is Health Savings Accounts. And as you probably are familiar, Health Savings Accounts are accounts where you can put pre-tax money into an account and that money is specifically for medical expenses. You can use it for Aspirin, even, or –
MIKE
Bandaids.
JENNIFER
Yeah. Probably crutches, I don’t know.
MIKE
Yeah.
JENNIFER
But anyway, you can use it for that. And what we always recommend is, don’t spend that money unless you absolutely have to, because you are allowed to let that money build up over time.
MIKE
Yeah. You can invest it.
JENNIFER
And when it gets over a certain balance, you can invest it and really let it grow. And then, ultimately, in your more likely to be ill years, later in life, you have quite a pot of money there that you can use tax-free to pay those medical expenses.
MIKE
Yeah.
JENNIFER
So, you’re like pre-saving for that. But the little known trick here is, if you started contributing to a Health Savings Account this year and you started saving all of your out-of-pocket medical expense receipts, including your copays and drugs and all of that in a file, as long as you have not deducted those costs on your tax return, you’ve just paid them out of pocket, no deduction, you can later reimburse yourself from the HSA tax-free because it doesn’t have to be in the year you make the distribution. So, it’s kind of a gold mine. I mean, you really – Okay. Hopefully, the IRS is not listening. But you really could take that money and reimburse yourself at age 60 for thousands of dollars you’ve spent and go on vacation with it, really.
MIKE
Yeah. Yeah.
JENNIFER
Tax free. Tax-free growth and tax-free distributions. But you have to be able to prove.
MIKE
Yeah.
JENNIFER
So, you need those receipts. Because again, if you ever get audited, you need to be able to say, “Yep, these were those expenses,” and you can see on the tax returns that you did not deduct. It’s really unusual for people to deduct medical expenses because it has to be a high percentage of your income that year.
MIKE
Yep.
JENNIFER
So, it’s unlikely, unless you had a serious health crisis, that you’ve deducted any medical expenses on your return. But just keep that part in mind.
MIKE
Yeah. And a lot of people, when you sign up for an HSA, you get the debit card in the mail for the HSA.
JENNIFER
Oh, yeah.
MIKE
And you could swipe that at Walgreens. So, that’s, in a way, getting the deduction when you’re making those expenses. So, that’s another element to this, is don’t do that.
JENNIFER
Yeah.
MIKE
Let that money sit. Get it invested, you know, into something, into index funds. If you let that money grow, then in the future, we can take a – this is literally the only vehicle that gives you all of the preferential tax treatment.
JENNIFER
Yeah.
MIKE
You get the deduction, you get the deferral, you get the tax-free distribution.
JENNIFER
Distribution. Yeah.
MIKE
I think the only thing from a savings standpoint that we would put ahead of something like this is getting your company match. And then shortly behind that is something like an HSA.
JENNIFER
Yeah.
MIKE
There’s no other vehicle that can do that.
JENNIFER
In 2023, a family can put $7,200 into an HSA. So, they limit how much you can put in every year, because it’s a gold mine, but definitely maximize your contributions to that particular vehicle if it is available to you. They only accompany high deductible medical insurance plans. So, they’re not actually available for everyone.
MIKE
Yeah.
JENNIFER
The industry seems to be going that way.
MIKE
Yeah. It’s definitely moving that direction. Yep.
JENNIFER
Yeah. Sorry. We’ve got a little list here and it’s in little tiny print.
MIKE
What’s next?
Tip #4 – Keep track of your Medicare summaries
JENNIFER
The Medicare summary.
MIKE
Yeah. So, if you’re on Medicare. This is just after they filed, right? Is to keep those Medicare summaries for a regular period. I think at least a year, is the recommendation.
JENNIFER
Or unless it’s been paid, right? Just make sure you get paid before you get rid of those summaries.
MIKE
Yes.
JENNIFER
Because they go into a review and then, eventually, it works its way through the system and it should get paid. But it’s worth holding onto, especially if you have higher medical expenses. And sort of what’s part of that is, when you’re working, you should get a notice of creditable coverage of your health insurance every year because you have to tell the government that you have medical insurance. It’s part of the Affordable Care Act, also known as Obamacare, that you’re required to have medical insurance. So, now we have to prove we have it. And in order to get Part D coverage for Medicare, you need that form. So, you really need to hold – it should be with your tax return every year. Another reason to hold on to your tax return. But just bear that in mind. So, I kind of stole half of yours.
MIKE
Yeah. No. That one’s always kind of confused me because that’s not one that I’m used to seeing, you know, when it comes across, in thinking that this is something that’s important.
JENNIFER
Yeah. I’ve been in situations where it was very important.
MIKE
Yes. Yeah.
Tip #5 – Storing your marriage certificate or divorce papers
JENNIFER
So, one thing also is to make sure your marriage certificate is where you can find it.
MIKE
Yeah.
JENNIFER
And I know that sounds weird, especially if you’ve been married a long time. But we’ve had a situation where a client was married for decades but the Social Security Administration did not know that. It had never been put on record. And so, it was a woman, and she had Social Security earnings of her own. So, she was taking her own benefit, which was more than half of her spouse’s benefit, so it never kind of became an issue when they were both living. But then her husband died, and his benefit was much higher. And legally, she’s entitled to his higher benefit, rather than her own. But the Social Security Administration didn’t know they were married and they wouldn’t give it to her. So, they had to go back through old county records. I mean, it took a lot of effort and time to fix the situation, which they did, but it was a lot harder than saying “here’s a copy of my marriage certificate.”
MIKE
Yeah.
JENNIFER
And kind of paired with that is, if you’re divorced, keep a copy of your divorce decree where you can find it, also for Social Security reasons, because you are entitled, even if you’re divorced and if you’ve been married 10 years, to half of your ex-spouse’s benefit if it’s higher than your own benefit. And ultimately, you can get the spouse’s benefit, right?
MIKE
Depending on, you know, if you’re not ever remarrying. Yep.
JENNIFER
That just stuck in my brain as funny. But you could technically have several ex-spouses who can be of benefit. If you’ve been married long enough to each of them.
MIKE
Yeah.
JENNIFER
They all have that access.
MIKE
Yeah. So, definitely an element to keep – that’s definitely one of those that, like, you hear it. And well, yeah, of course you should keep your marriage certificate. But I would bet a lot of people watching are thinking, “Wait, where is my marriage certificate?”
JENNIFER
I know. I know. Well, as many of you know, I’m married for the second time. My first husband died a few years ago, and I needed it for something, and I finally figured out I had framed it and I had to get it out of the frame because I didn’t know. Anyway. So, that probably wasn’t the best thing to do, but anyway. Oh, we get to go onto Roth stuff.
Tip #6 – Keep track of your Roth conversions
MIKE
Yeah. So, this one is another one that we’ve recently seen in a couple different elements with clients, but if you’ve made any kind of Roth conversions, tracking that or keeping record of those Roth conversions is an important thing from several different angles. One of the one that we know of, especially prior to 59.5 when the penalty to access IRA money goes away, so you reach that age, if you make Roth conversions prior to that, every conversion starts this 5-year window. I guess we won’t get into details around kind of those conversions or contributions to a Roth and how that works, but because of that 5-year window, keeping track of when Roth conversions take place is an important element because you don’t want to be penalized for accessing that money after that. It has to be at least that 5-year window before that 10% penalty falls off.
JENNIFER
Yeah. Normally, Roth contribution money, you can access at any point in time after you put the money in, penalty-free, because you already paid taxes on that.
MIKE
Right.
JENNIFER
You can’t access the growth at any time penalty-free, but because of that 5-year clock, you need to keep track of any conversions you do.
MIKE
Yeah. It’s a weird – without that 5-year window, it could be a little loophole where you could get around that 10% penalty. So, that’s why that 5-year window exists on those Roth conversions. That’s the importance of kind of keeping track of that.
JENNIFER
I’d also add, just keep track of how many Roth contributions, if you’re eligible to make them and you make them, because then you know your basis.
MIKE
Right.
JENNIFER
How much you’ve contributed and how much you can access penalty-free at any time.
MIKE
Yeah.
JENNIFER
So, just keeping track of that too.
MIKE
Yep.
JENNIFER
Which should also be on your tax return. It’s amazing how this is all centered around taxes and Social Security.
MIKE
Yeah. Yep.
Tip #7 – Filing a Form 8606 for IRA contributions
JENNIFER
So, speaking of tax returns, if you make a contribution to your traditional IRA and it is not deductible because you are participating or eligible to participate in your employer retirement plan, you need to file an 8606 form with your tax return, and that tells the IRS that you’ve already paid taxes on that money. It’s nondeductible, as you can’t deduct it off your income taxes. And what happens later on, if the government does not know that you have already paid taxes on that money, via that form, that’s kind of the only way you can prove it.
MIKE
Yeah.
JENNIFER
If they don’t know when you make distributions later, you have to pay taxes on that money again. So, it really does – it can, especially if you are a regular contributor to nondeductible IRA, they’re not necessarily a different kind of IRA, it can really become important later that you’ve kept track of that and that the IRS is aware of that, that that’s how that money comes out. It just saves you taxes in the long run.
MIKE
Yeah. And the institution is not doing that. When you take money out of any IRA, like, we use TD Ameritrade as our custodian, TD Ameritrade is going to send the same form to you from a tax perspective, just really saying, “Hey, you took this money out of your IRA.” They don’t know how much of it was nondeductible contributions. So, from a tax perspective, they’re not going to have that information and the onus is on you when you go to file to be able to prove with that 8606 that, you know, this dollar amount was all contributed after tax, nondeductible. So, you don’t have to pay taxes twice.
JENNIFER
Yeah. And the 8606 keeps a running total. So, it’s probably good to keep your old 8606s, even after you’ve shredded the 10 year old tax return, but it should keep a running total so your current year has all the contributions you’ve made that were nondeductible.
MIKE
Yeah. I think the way that shows up on the 8606, it basically takes last year’s balance and you’re just adding to it.
JENNIFER
Yeah. For sure.
MIKE
Yep.
Tip #8 – Keep records of your home improvements
JENNIFER
All right. Last one.
MIKE
Yeah. Last one. This is the one that probably doesn’t need to come up too often, but keeping track of improvements to your home. Right? Is that the last one? Yes. From a dollar standpoint, I guess there’s the tax treatment of selling a house. So, after you’ve lived in your house for however long and you’re selling it and moving to wherever. It really doesn’t matter. You know, moving into a retirement home or just downsizing or, you know, moving to a different state. It doesn’t matter what it is. As far as the IRS is concerned, there’s a, if you’re single, $250,000 exclusion or I guess exemption for the increased value of your home. So, you buy a house today for $100,000 and, you know, a decade later, we sell it for $300,000. We’ve got a $200,000 gain. Right? So, your basis, what you paid for the house, you’ve increased the sale of that. So, now we’ve got taxes on a portion of that sale as a capital gain. However, any kind of improvements that you make to your house, you’re adding to the basis. You’re essentially pouring money back into that asset. Your house is an asset. So, keeping track of those just in the event that you possibly trip that, I guess, gain on your house.
JENNIFER
Yeah. If you’re single, the first $250,000 in gain is exempt from taxes, no matter what.
MIKE
And has that changed possibly, historically?
JENNIFER
Yes.
MIKE
I don’t know. Is that a –
JENNIFER
It used to be – and then if you’re married, it’s $500,000.
MIKE
Yeah.
JENNIFER
It used to be, as long as you bought another property and rolled the value, you’d never paid the gain.
MIKE
Oh, right. Yeah. Okay.
JENNIFER
So, that changed. It’s been several years. I don’t remember what year.
MIKE
Has that exemption increased? Do they put, like, an inflation factor on that or anything? Or has it been 500 for –
JENNIFER
It’s been that as long as I can remember them changing the law.
MIKE
So, that could potentially change.
JENNIFER
It could.
MIKE
Because there’s that –
JENNIFER
Yeah. So, if you’ve got a $300,000 gain and you’re single, you would pay taxes on $50,000, unless you can prove you’ve added value to the home. And that doesn’t mean, like, painting the kitchen. It means, like, putting on an addition. Finishing the attic. It’s got to be an actual change to the structure of some way.
MIKE
Yeah.
JENNIFER
Replacing your roof doesn’t count, because that’s part of the house already.
MIKE
Right.
JENNIFER
That sort of thing. But those can be almost impossible to recreate those receipts if you don’t keep them all along. And you don’t have to prove it with your tax return, that you’ve done that. If you had a $300,000 gain and you said, “I don’t have to pay taxes on any of it,” you don’t have to prove it unless you get audited. And that’s why you absolutely have to have the receipts. Otherwise, don’t even try it. So, it is important. So, there’s lots of these little nuances of things that are worth holding onto. And I know, personally, I get in this “I’m cleaning out everything, you know, in front of me.” But be careful what you actually do clean out, because some things are much more important than you might realize at the time.
MIKE
Yep.
JENNIFER
So, thank you for joining us, and we’ll talk to you soon.
MIKE
Yeah. Next time. Thanks!
JENNIFER
Thanks! Bye!
