The 5 Biggest Financial Planning Mistakes Made by Tech Professionals | Recap

The 5 Biggest Financial Planning Mistakes Made by Tech Professionals | Recap

 

I love working with the tech community. I started my career at Microsoft and have since been inspired by the creative and innovative minds of folks working at tech companies large and small. I also enjoy working with tech employees, because as a personal finance nerd, I get to help people navigate the plethora of benefits available that are often only available at tech companies. Between RSUs, ESPP, Non-Qualified or Incentive Stock Options, Mega Backdoor Roth 401(k)s, Deferred Compensation, Legal Services, and even Pet Insurance, it is the benefits equivalent of picking from a menu of a Michelin three-star-rated restaurant.

 

Through my own experience as a tech employee and my experiences now as an advisor working with tech professionals, I’ve identified some of the biggest financial planning mistakes that can hold the tech community back from achieving financial independence and success.

 

Mistake #1 – Not Optimizing Benefits

 

We all are familiar with the paradox of choice. Most people, when faced with a long list of complicated benefits that even some financial professionals struggle to understand, will focus on the areas that are familiar and disregard the rest. Who wants to spend their free time reading about ESPP taxation or the mechanics of Roth Conversions on after-tax 401(k) contributions? Chances are that if you work for a growing tech company, you have very little free time to begin with.

 

While it may not be the most enjoyable use of your evenings or weekends, I can’t emphasize enough how valuable it is to invest the time to learn how to optimize your benefits now. Choosing to invest additional savings in your Mega Backdoor Roth 401(k) over a taxable brokerage account may shave a couple of years off your retirement date. Maximizing HSA contributions and investing the growing account balance can provide for a substantial amount of money to pay for high healthcare costs if you retire before you are Medicare eligible (age 65). Making strategic Roth Conversions during lower income years, such as in early retirement or during breaks from paid employment, can save hundreds of thousands of dollars in future taxes over the course of your lifetime. The list goes on, trust me.

 

If I don’t exercise for a week, or even a month, I probably won’t notice a significant difference in my overall health. If I keep telling myself that I’ll start a workout routine, but years go by without investing my time and energy into making the plan a reality, my physical fitness will take a toll, and I will also lose out on all the amazing benefits that exercising regularly provides. I may look back with regret at some point later in life that maybe certain health issues could have been minimized or prevented if I had spent the time to prioritize what is truly important. It is critical to think beyond how something may impact us in the short term and recognize the long-term impacts of choosing to continue to put something on the back burner. Ask yourself, what impact will this have on my life if I wait a year to prioritize my personal finances? What effect will it have on my life if I wait ten years to prioritize my personal finances? Chances are that impact is even greater than you think.

 

 

Mistake #2 – Building and Maintaining Concentrated Stock Positions

 

I consider a concentrated position to be any investment that comprises over a quarter of your investable assets. It can be easy to accumulate a concentrated stock position in the same company that is responsible for your paycheck. If you receive stock as part of your compensation, without a disciplined plan to sell shares on an ongoing basis, you will continue to accumulate more and more company stock. Over the past several years, countless families have become wealthy because of the stock compensation they’ve received and its seemingly never-ending climb in price. While the strategy of holding onto RSUs and ESPP over the recent past has worked out incredibly well, we know that continuing to maintain a concentrated stock position is incredibly risky if you want to ensure you maintain your newly built wealth.

 

There are two explanations for not reducing a concentrated position that I hear most often: (1) My company has outperformed the rest of the market several years in a row. If I believe in my company and our growth prospects for the future, why would I sell? (2) If I sell my company stock now, I’ll have to pay a significant amount of tax on the gain. Let’s debunk each of these as reasons not to diversify:

 

(1) Typically, returns of a single stock position are intensely more volatile than the returns of a market index. This can work out in your favor, or it can work to your detriment. Historically, about 12% of stocks result in a 100% loss.[1] In addition, approximately 40% of stocks end up with negative lifetime returns, and the median stock underperformed the market by greater than 50%.1 This means that a few star performers drive the positive average returns of the market. The odds of randomly picking one of these extreme winners is 1 in 15.1 If you’ve been lucky enough to hold one of these outperformers, I encourage some humility around acknowledging that maybe being in the right place at the right time has attributed to your rapid accumulation of wealth.

 

Companies that achieve such success and become the largest company in their sector may become subject to what is called the winner’s curse. Since the 1970s, data shows that sector leaders underperform their sector by 30% in the five years after becoming the largest company in that sector.1 Over a long time horizon, you are probably more likely to obtain positive investment returns by ensuring you hold the future Microsofts and Amazons of the world through broad diversification, not concentration.

 

(2) I hate to tell you this, but unless you hold onto an investment until you die, you will have to pay tax on the growth at some point. I encourage people to think of paying long-term capital gains taxes as a good thing, because it means your investments went up and you made money. A surprisingly small fluctuation in stock price can wipe out any benefit of delaying the recognition of capital gains tax. As advisors like to say, “Don’t let the tax tail wag the dog.”

 

 

Mistake #3 – Burning Out

 

There has been a significant decline in Americans’ use of vacation time. Twenty years ago, the average American took almost three weeks of vacation per year. As of 2016, Americans average only about 16 days of vacation per year, almost a full week less. You might think that improvements in technology over this 20-year timeframe would allow us to be more productive and therefore take more time off. It seems that the curse of this increased productivity is a greater reluctance to disconnect from work and give ourselves the permission to unplug.

 

Taking more time off has a positive impact on your physical and mental wellbeing. For those that need more convincing to submit a PTO request, research has found that those who take vacations are more likely to get promoted than those who underutilize their available time off. Taking steps to prevent burnout can not only lengthen your career and make it more sustainable, but it can also get you an increase in title and a pay increase. If that isn’t a compelling argument for taking a vacation, then I don’t know what is. At Merriman, we want to help you achieve your definition of living fully, whether to you that means taking time off for an epic adventure or maybe you have a larger goal of making work optional.

 

 

Mistake #4 – Poor Risk Management

 

Here are some fun facts for your next socially distant dinner party. If you are a 40-year-old male and you were in a room with one hundred other 40-year-old men, statistically speaking, two of those men will pass away before they reach their 50th birthdays. Another seven will have passed away before they reach their 60th birthdays, and another thirteen won’t make it to their 70th birthday. Close to a quarter of forty-year-old men will die before age 70. Do I have your attention now?

 

I don’t bring these grim statistics up to scare you. I bring them up because I’ve seen first-hand how a failure to plan for risk and the realities of life can cause significant financial harm during an already emotionally devastating time. Nobody enjoys talking about death and disability, but it is a fact of life that we will all pass on at some point. It is only fair to the people we love that we at least protect them financially.

 

Estate Planning and Insurance Planning are often the two most overlooked areas in a financial plan for folks that have not worked with an advisor. Financial advisors will also tell you this is often where we see our clients procrastinate the most. There are many things in life that feel urgent but are not actually important. We put off the important items, like drafting an Estate Plan, to answer our emails and do other tasks that have more of an immediate pull on our time and energy. There will always be those items to complete that feel pressing, but try to think through the consequences of not completing your will or obtaining life insurance if, in fact, your time has actually run out.

 

 

Mistake #5 – Not Hiring an Advisor

 

Yes, I get it. Hiring an advisor means paying fees. And hiring a bad advisor can be more harmful than helpful. But just like everything else in life, there can be a lot of value in employing the knowledge and resources of an expert. I don’t cut my own hair for a reason, and I wouldn’t dream of providing my own defense in any sort of lawsuit. If you have a handle on your investments, are rebalancing your portfolio like a pro, and have done extensive research on your company’s benefits and how to utilize them, then by all means, carry on, you fellow financial-planning nerd. I wish everyone fell into this category, but it is rare that I talk with someone who doesn’t need help in at least one major financial planning area.

 

If you do hire someone, be sure to hire a fee-only fiduciary advisor. You’ll need to explicitly ask this question, and if the answer is no, I suggest you run far, far away. Also, if you’re afraid of commitment, ask what the process and cost is of leaving an advisor if you aren’t seeing value from the relationship. Work with an advisory firm who isn’t going to make it difficult or expensive to end your relationship. Without any significant barriers to exiting the relationship, your advisor will be motivated to make sure you are getting great service and will want to remain a client for years to come. If you’re looking for an advisor you’re compatible with, consider perusing our advisor bios. If you’d like to discuss your situation, don’t hesitate to contact me.

 

 

 

1 Avoid Gambler’s Ruin: Bridging Concentrated Stock and Diversification

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

 

 
The 5 Biggest Financial Planning Mistakes Made by Tech Professionals | Mistake #5

The 5 Biggest Financial Planning Mistakes Made by Tech Professionals | Mistake #5

I love working with the tech community. I started my career at Microsoft and have since been inspired by the creative and innovative minds of folks working at tech companies large and small. I also enjoy working with tech employees, because as a personal finance nerd, I get to help people navigate the plethora of benefits available that are often only available at tech companies. Between RSUs, ESPP, Non-Qualified or Incentive Stock Options, Mega Backdoor Roth 401(k)s, Deferred Compensation, Legal Services, and even Pet Insurance, it is the benefits equivalent of picking from a menu of a Michelin three-star-rated restaurant.

 

Through my own experience as a tech employee and my experiences now as an advisor working with tech professionals, I’ve identified some of the biggest financial planning mistakes that can hold the tech community back from achieving financial independence and success.

 

Mistake #5 – Not Hiring an Advisor

 

Yes, I get it. Hiring an advisor means paying fees. And hiring a bad advisor can be more harmful than helpful. But just like everything else in life, there can be a lot of value in employing the knowledge and resources of an expert. I don’t cut my own hair for a reason, and I wouldn’t dream of providing my own defense in any sort of lawsuit. If you have a handle on your investments, are rebalancing your portfolio like a pro, and have done extensive research on your company’s benefits and how to utilize them, then by all means, carry on, you fellow financial-planning nerd. I wish everyone fell into this category, but it is rare that I talk with someone who doesn’t need help in at least one major financial planning area.

 

If you do hire someone, be sure to hire a fee-only fiduciary advisor. You’ll need to explicitly ask this question, and if the answer is no, I suggest you run far, far away. Also, if you’re afraid of commitment, ask what the process and cost is of leaving an advisor if you aren’t seeing value from the relationship. Work with an advisory firm who isn’t going to make it difficult or expensive to end your relationship. Without any significant barriers to exiting the relationship, your advisor will be motivated to make sure you are getting great service and will want to remain a client for years to come. If you’re looking for an advisor you’re compatible with, consider perusing our advisor bios.

 

Be sure to read our previous blog posts for additional mistakes to avoid as a tech professional.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

Beware of the Tax Cost of Turning Your Primary House into a Rental Property

Beware of the Tax Cost of Turning Your Primary House into a Rental Property

 

Since the financial downturn and real estate crisis in 2007–09, residential real estate in many parts of the country has seen a significant increase in value. This increase has created additional considerations for homeowners deciding if they want to sell an existing property or convert it into a rental.

 

Rental properties are taxed differently than personal residences. In some cases, these can make it tempting to move into an existing rental property for a few years to reduce the taxable income on the sale.

 

Homeowners also need to be mindful of the reverse—how the decision to turn a primary house into a rental property can be a poor tax move.

 

Tax Benefits When Selling Your Personal Residence

 

Since 1997, homeowners have been able to use the Section 121 exclusion to exclude up to $250,000 of gains from taxation ($500,000 if married filing jointly) upon the sale of a property. In order to qualify, the taxpayer must own and use the property as a primary residence for two of the past five years. Notably, these two years do not have to be the most recent two years. A taxpayer could live in a property from 2017–2019 then sell the property in 2021 and still qualify.

 

Example 1: Jolene and Max purchased their house in June 2011 for $400,000. They sell in June 2021 for $850,000. Because their total gain is less than $500,000, none of that gain needs to be reported as taxable income when they sell their property.

 

Example 2: Luke and Jenny purchased their home in June 2011 for $400,000. They sell in June 2021 for $1,050,000. Because their gain is $650,000, they will need to include the $150,000 above the $500,000 exclusion in their income. This $150,000 will be taxed at long-term capital gains rates. (NOTE: If Luke and Jenny did significant renovations, those costs can potentially be added to the $400,000 purchase price, reducing the taxable income.)

 

Understanding the Tax Impact of Turning Your Primary House into a Rental Property

 

When deciding to move into a new house, homeowners often have two options for their existing property: they can sell it or turn it into a rental property. While turning a primary residence can offer the appeal of receiving monthly rental income, turning your house into a rental property can have a significant tax hit come tax time if you decide to sell.

 

Example 3: Jolene and Max from Example 1 decide in June 2021 to turn their house into a rental property rather than sell. After 2 years, they decide they would rather not be landlords and sell the property in June 2023 for $850,000. Because they lived in the house as their primary residence for at least two of the last five years, they still qualify for the Section 121 exclusion. In fact, because the rental period happened after they lived in the house as their primary residence, they don’t even need to prorate the gain between periods of qualifying and non-qualifying use as they would if they moved back into the rental property. The only income to be reported is the recapture of any depreciation that was taken during the rental period.

 

Example 4: Jolene and Max from Example 1 decide in June 2021 to turn their house into a rental property rather than sell. In this case, they keep it as a rental property for four years before selling the property in June 2025 for $850,000.

When they sell their house in June 2025, it was only used as a personal residence for one of the past five years. They no longer qualify for the Section 121 exclusion. The entire $450,000 gain will be included in their taxable income. They will also have to recapture any depreciation that was taken during the rental period.

 

Jolene and Max’s decision in Example 4 to rent their house for four years before selling it has resulted in a significantly higher tax bill than they would have had if they sold it immediately or if they had sold it after only a few years of renting out the property.

 

Planning Opportunities for Real Estate that Was Converted into a Rental Property

 

There are several planning opportunities that owners might consider if they are in Jolene and Max’s situation described in example 4. These include:

 

  1. Moving back into the property to re-gain the exclusion
  2. Continue renting out the property until qualifying for a step-up in cost basis
  3. Consider a Section 1031 exchange into a different rental property
  4. Sell the principal residence and purchase a different rental property

 

Move Back into the Property to Re-Gain the Exclusion

 

Individuals can move back into the rental property to regain some of the exclusion.

 

Example 5: Tina and Troy purchased their house in June 2011 for $400,000. They turned it into a rental property in June 2015. In June 2019, they want to sell the house. Because it was a rental property for the past four years, all gains will be included in taxable income.

They decide to move back into their house in June 2019 and sell it in June 2021 for $850,000. They now qualify for the Section 121 exclusion because it was their primary house for at least two of the last five years.

 

When they sell their house in 2021, it had six years of qualified use as a personal residence and four years of non-qualified use as a rental property. The $450,000 of gains will be prorated between $450,000 x 60% = $270,000 that can be excluded and $450,000 x 40% = $180,000 that cannot be excluded.

 

Also, all depreciation that was taken during the four years as a rental property will be included in taxable income when the house is sold.

 

By moving back into their rental property for two years, Tina and Troy were able to exclude some, but not all, of the gains from the years they owned the property.

 

Continue Renting Out the Property Until Qualifying for a Step-Up in Cost Basis

 

Currently, when the owner of an asset dies, that asset gets a complete step-up in cost basis. Any gains that might otherwise have been included in taxable income are erased, and the cost basis is “reset” as if the taxpayer purchased the asset on the date of death.

 

Example 6: Tina and Troy from Example 5 don’t move back into the house in 2019, but they instead continue to rent it out. They live in Washington, and Troy is in bad health. Troy dies in June 2021 when the rental house is worth $850,000.

 

Tina receives a complete step-up in cost basis. It is now treated as if she purchased the house for $850,000. If she sells the house for $850,000, there is no taxable income, regardless of whether it is a personal or a rental property.

 

The example above assumes Troy and Tina live in a community property state like Washington (or California, Texas, or several others). If they live in a common law state, they likely would not receive the full step-up in cost basis described. Also, owners of rental properties receive a step-up in any depreciation taken in addition to the capital gains, providing an even more powerful tax benefit.

 

Consider a Section 1031 Exchange into a Different Rental Property

 

If a taxpayer no longer wants to rent out their current property, but they are willing to have a rental property, they can defer taxes with a Section 1031 exchange into a new rental property. The taxpayer can sell one rental property, purchase a new rental property, and transfer the cost basis. This will delay any taxes until the new rental is ultimately sold.

 

This 1031 exchange is a complicated process that requires working with a broker who specializes in it. This exchange can only be done with rental properties. It cannot be used to turn a rental property into a new primary house.

 

Sell the Principal Residence and Purchase a Different Rental Property

 

The final strategy to consider is to sidestep the issue altogether. If the taxpayer is moving out of a principal house and wants to own a rental property, it may be more tax efficient to sell the principal residence then purchase a different rental property.

 

By selling the principal residence before turning it into a rental property, the taxpayer can exclude all gains up to the $250,000 or $500,000 maximum of the Section 121 exclusion. Then the new rental property can be purchased and managed with a “reset” higher cost basis.

 

Conclusion

 

When moving out of a house, it may be tempting to turn that house into a rental property. There may be benefits to receiving increased cashflow that a rental can provide.

 

However, if you have a property with significant appreciation, consider carefully any decision to rent it out when you leave. This decision to rent out the property may give up far more in tax benefits than are received in new rental income.

 

If you’d like to understand the right approach for you, contact the Merriman team to strategize the decision to rent or sell your property while remaining mindful of the big picture.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

The 5 Biggest Financial Planning Mistakes Made by Tech Professionals | Mistake #4

The 5 Biggest Financial Planning Mistakes Made by Tech Professionals | Mistake #4

 

 

I love working with the tech community. I started my career at Microsoft and have since been inspired by the creative and innovative minds of folks working at tech companies large and small. I also enjoy working with tech employees, because as a personal finance nerd, I get to help people navigate the plethora of benefits available that are often only available at tech companies. Between RSUs, ESPP, Non-Qualified or Incentive Stock Options, Mega Backdoor Roth 401(k)s, Deferred Compensation, Legal Services, and even Pet Insurance, it is the benefits equivalent of picking from a menu of a Michelin three-star-rated restaurant.

 

Through my own experience as a tech employee and my experiences now as an advisor working with tech professionals, I’ve identified some of the biggest financial planning mistakes that can hold the tech community back from achieving financial independence and success.

 

Mistake #4 – Poor Risk Management

 

Here are some fun facts for your next socially distant dinner party. If you are a 40-year-old male and you were in a room with one hundred other 40-year-old men, statistically speaking, two of those men will pass away before they reach their 50th birthdays. Another seven will have passed away before they reach their 60th birthdays, and another thirteen won’t make it to their 70th birthday. Close to a quarter of forty-year-old men will die before age 70. Do I have your attention now?

 

I don’t bring these grim statistics up to scare you. I bring them up because I’ve seen first-hand how a failure to plan for risk and the realities of life can cause significant financial harm during an already emotionally devastating time. Nobody enjoys talking about death and disability, but it is a fact of life that we will all pass on at some point. It is only fair to the people we love that we at least protect them financially.

 

Estate Planning and Insurance Planning are often the two most overlooked areas in a financial plan for folks that have not worked with an advisor. Financial advisors will also tell you this is often where we see our clients procrastinate the most. There are many things in life that feel urgent but are not actually important. We put off the important items, like drafting an Estate Plan, to answer our emails and do other tasks that have more of an immediate pull on our time and energy. There will always be those items to complete that feel pressing, but try to think through the consequences of not completing your will or obtaining life insurance if, in fact, your time has actually run out. If you’re looking for an accountability partner and guidance through this process, please don’t hesitate to reach out to us.

 

Be sure to read our previous and upcoming blog posts for additional mistakes to avoid as a tech professional.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

The 5 Biggest Financial Planning Mistakes Made by Tech Professionals | Mistake #2

The 5 Biggest Financial Planning Mistakes Made by Tech Professionals | Mistake #2

 

 

I love working with the tech community. I started my career at Microsoft and have since been inspired by the creative and innovative minds of folks working at tech companies large and small. I also enjoy working with tech employees, because as a personal finance nerd, I get to help people navigate the plethora of benefits available that are often only available at tech companies. Between RSUs, ESPP, Non-Qualified or Incentive Stock Options, Mega Backdoor Roth 401(k)s, Deferred Compensation, Legal Services, and even Pet Insurance, it is the benefits equivalent of picking from a menu of a Michelin three-star-rated restaurant.

 

Through my own experience as a tech employee and my experiences now as an advisor working with tech professionals, I’ve identified some of the biggest financial planning mistakes that can hold the tech community back from achieving financial independence and success.

 

Mistake #2 – Building and Maintaining Concentrated Stock Positions

 

I consider a concentrated position to be any investment that comprises over a quarter of your investable assets. It can be easy to accumulate a concentrated stock position in the same company that is responsible for your paycheck. If you receive stock as part of your compensation, without a disciplined plan to sell shares on an ongoing basis, you will continue to accumulate more and more company stock. Over the past several years, countless families have become wealthy because of the stock compensation they’ve received and its seemingly never-ending climb in price. While the strategy of holding onto RSUs and ESPP over the recent past has worked out incredibly well, we know that continuing to maintain a concentrated stock position is incredibly risky if you want to ensure you maintain your newly built wealth.

 

There are two explanations for not reducing a concentrated position that I hear most often: (1) My company has outperformed the rest of the market several years in a row. If I believe in my company and our growth prospects for the future, why would I sell? (2) If I sell my company stock now, I’ll have to pay a significant amount of tax on the gain. Let’s debunk each of these as reasons not to diversify:

 

(1) Typically, returns of a single stock position are intensely more volatile than the returns of a market index. This can work out in your favor, or it can work to your detriment. Historically, about 12% of stocks result in a 100% loss.* In addition, approximately 40% of stocks end up with negative lifetime returns, and the median stock underperformed the market by greater than 50%.* This means that a few star performers drive the positive average returns of the market. The odds of randomly picking one of these extreme winners is 1 in 15.* If you’ve been lucky enough to hold one of these outperformers, I encourage some humility around acknowledging that maybe being in the right place at the right time has attributed to your rapid accumulation of wealth.

 

Companies that achieve such success and become the largest company in their sector may become subject to what is called the winner’s curse. Since the 1970s, data shows that sector leaders underperform their sector by 30% in the five years after becoming the largest company in that sector.* Over a long time horizon, you are probably more likely to obtain positive investment returns by ensuring you hold the future Microsofts and Amazons of the world through broad diversification, not concentration.

 

(2) I hate to tell you this, but unless you hold onto an investment until you die, you will have to pay tax on the growth at some point. I encourage people to think of paying long-term capital gains taxes as a good thing, because it means your investments went up and you made money. A surprisingly small fluctuation in stock price can wipe out any benefit of delaying the recognition of capital gains tax. As advisors like to say, “Don’t let the tax tail wag the dog.” If you’d like to discuss your situation, don’t hesitate to contact me.

 

Be sure to read our previous and upcoming blog posts for additional mistakes to avoid as a tech professional.

Source: * Avoid Gambler’s Ruin: Bridging Concentrated Stock and Diversification 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

Spring Document Cleaning

Spring Document Cleaning

 

It’s almost spring, which means it’s time for some spring cleaning—and this spring’s focus is paperwork. I don’t know about you, but I don’t love paperwork. I’ve spent years working toward zero paper, and I’m now finally down to a handful of documents. I’ll share some tips below so you can minimize your paperwork, too!

Document delivery. If you’re tired of getting statements for your accounts or bills in the mail, try signing up for e-delivery instead. This will help save time and energy opening and sorting mail and having to dispose of it as well. Don’t forget to proactively visit the proper websites to check those statements and pay those bills.

Document retention. We all know we need to hang onto certain tax, asset, and legal documentation, but sometimes the specifics can be tough to remember. Here’s a quick list of the most common situations where you’ll need to keep documentation. Please see this checklist for a detailed list.

Income tax returns. Keep at least three years of state and federal tax returns and supporting documentation on file. Supporting documentation includes records that prove any income, deductions (including medical expenses), or credits claimed (W-2, 1099, end-of-year statements from banks and investment accounts). Depending on the state (like CA), you may need to keep tax returns for longer than three years. If you think you forgot to report income and it’s more than 25% of your gross income, keep six years of tax returns. If you are claiming a loss for worthless securities or bad debt deduction, keep records for seven years.

Investment accounts or bank accounts. Consider keeping the most current statements on file and the end-of-year statement until you complete your tax return.

Retirement accounts. Consider keeping documentation on any contributions, withdrawals, and conversions. If you made non-deductible traditional IRA contributions, keep Form 8606 until the account is fully withdrawn to track cost basis.

Debt (student loans, mortgage). Keep the loan documents until the loan is paid off. Once the loan is paid off, keep documentation proving that the loan has been paid in full.
Property (automobiles, real estate). Consider keeping any deeds, titles, settlement statements, or bills of sale until you sell the property. Keep documentation showing purchase-related fees that were capitalized until you sell the property.

Home improvements. Keep any receipts related to home improvements as they may be used to substantiate any adjustments to the cost basis for your property.
Insurance policies. Keep the most current policies on file.

Estate plan. Keep a copy of your Will, Trust(s), Powers of Attorney (General and Healthcare), Living Will or Healthcare Directive, and beneficiary designations on file, and store the originals in a safe place.

Document storage. To reduce your paperwork, try storing these must-keep documents on your secure personal computer. Of course, with this storage method, it’s important to back up your electronic files and have firewall protection.

Document disposal. Please remember to shred any documentation that contains sensitive personal information, such as your Social Security numbers or account numbers. A personal shredder should do the trick and will be less expensive in the long run if you’re disposing of documents each year.

Password organization. How are you currently storing and keeping track of your passwords? I recommend using a cloud-based password manager like LastPass where you can store all your passwords in one place and only need to remember the “master” password to access them. LastPass has a random password generator to help you create complex passwords that are more difficult to hack. LastPass also offers two-factor authentication and doesn’t allow your “master” password to be reset to keep your account secure.

Digitize your photos. Does your paperwork include old family photos you’ve been meaning to digitize? Try sending them to a digitizing service like Legacy Box where they’ll scan and save them to a thumb drive, DVD, or the cloud. Legacy Box works with tapes and films, too. While this service may seem pricey, it might be worth paying someone to digitize those photos as they are priceless memories and should be backed up sooner rather than later in case something happens to the physical copies.

Inform your family. Make sure your family knows where you keep your documents and what your “master” password is in case something happens to you. This is especially important for estate planning documents. Having these conversations ahead of time will help alleviate the stress on your loved ones of not knowing what to do or where to find things.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.