As an investor, you’re receiving monthly investment account statements, as well as annual statements and tax documents. Whether they arrive on paper or digitally, they can overwhelm both you and your mailboxes, and we are often asked “Do I need to keep these things?”
We do advise that you hang on to some investment documents. Many contain information that is valuable for several reasons – mostly tax-related. Here’s an example that illustrates the value of holding onto certain documents.
An Eddy & Schein Client Story
Our client Barbara recently received a bit of a shock in the form of letters from both the IRS and the New York State Department of Taxation and Finance. The letters stated that she had a large tax debt related to investment income earned in 2010. Barbara did not have any idea why.
We started by helping Barbara obtain transcripts of her taxable income for 2010. These documents revealed proceeds of the sale of securities but did not show the amount she initially invested. So, the tax authorities considered the entire amount of the sales to be income.
If Barbara had kept the document that showed the purchase prices, submitting it for tax purposes would have been an easy task. Curiously, Barbara could not get documents from the firm that held the securities in 2010 since Securities and Exchange Commission regulations don’t require brokerage firms to maintain records that far back.
So, to help Barbara, we set about researching the securities and our investigation produced the missing data. We helped her estimate the cost basis that her accountant needed to challenge the tax liability.
Barbara was elated when the both IRS and the State tax department notified her that all was settled. She owed nothing!
After Barbara’s story, you’re probably thinking about your own investment statements and wondering what you need to do.
What should you keep?
Of all the documents that you receive, these are the most important:
These report investment income and loss and should be stored with your historical tax returns.
Hold these until you get the year-end annual statement, then slip them into your shredder.
Based on our experience with what documents and information our clients typically need, we suggest to anyone with investments that you retain and organize your annual statements as far back as you have invested or inherited, or back to some other cost-basis action. Obtaining missing documents isn’t always possible, so being diligent is important.
The annual statement contains valuable information about investment activity during the year, including:
- purchases and sales
- deposits and withdrawals
- dividend and interest income
- taxes withheld
- realized gains and losses
- derivatives activity
- margin loan activity
- fees (related to commissions or management, foreign stock holdings, etc.)
Why keep these documents?
You’ll want to have your investment details if your investment bank merges, your investment manager changes within the same firm or moves to another firm, or for unexpected situations like Barbara’s. The historical data in these documents is used for:
- Purchase date and cost basis, which can determine the taxable income of sales and gifts
- Investment management fees, which can be deducted on state tax returns
- Margin loan activity, which has varying tax treatment
- Recording loans from an investment portfolio to or from others, which have specific tax requirements
- Divorce proceedings, which may require an equitable cost basis division
- Claims in class action lawsuits against a company whose security you hold or have held, for which proof of purchase, ownership, and sale dates are required
- Inherited securities, which may be eligible for step-up in cost basis (a change in the cost basis from the time of purchase to date of death)
How to obtain and manage these documents?
To make sure you are in control by safeguarding important documents, do the following:
- Develop a filing system for important investment documents (physical and/or electronic).
- Back up your data on an external hard drive as well as to the cloud.
- Collect all past annual statements from investment management websites or by requesting hard copies from the investment manager.
- Download monthly statements and annual statements regularly. Digital access to historical records may be restricted:
- – If investment advisors change, even within the same firm
- – If online access has been denied and requires a physical visit to a bank branch, but the investor may be unable to do so
- – Once the investor has died, even if the estate has not been settled
If you find yourself in a situation like Barbara’s or need to obtain and organize your investment documents, contact Eddy & Schein. We’re here to help with your personal finance management needs and questions.