| While you might assume any mutual fund investor | | | | the account is adeduction for purposes of |
| should use Money’s mutual | | | | calculating your taxable income. Money you move |
| fundrecord-keeping tools, that isn’t the case. | | | | out ofyour account is an income amount for |
| Because investment record keeping,including | | | | purposes of calculating your income tax return. |
| mutual fund record keeping, requires significant | | | | NOTE The general rule described in the preceding |
| work and involves complex-ity, you need to | | | | paragraph—that money moved intoand out of |
| make sure the effort is worth it. | | | | a tax-deferred investment account is what |
| In general, you keep investment records for any | | | | produces a tax deduc-tion or taxable income |
| of the following reasons: | | | | amount—is true. However, predictably, some |
| • You want to track interest and dividend | | | | tax-deferred investment accounts don’t work |
| income. | | | | this way. There are, for example,nondeductible |
| • You want to track realized and unrealized | | | | IRAs. A nondeductible IRA doesn’t give the |
| capital gains and losses. | | | | taxpayer a deduc-tion merely for moving money |
| • You want to measure or grade the | | | | into the account. Also, a Roth IRA doesn’t |
| profitability of an investment by calculating | | | | ac-tually produce any taxable income just because |
| itsannual return or yield. | | | | you move money out of theaccount. The primary |
| Obviously, all three of the tasks in this list sound | | | | benefit of a Roth IRA is that you get to |
| worthwhile, but many investors won’tneed to | | | | withdraw moneyfrom the IRA without including |
| use Money’s record-keeping tools to get this | | | | the withdrawal on your tax return. However,in |
| sort of information. | | | | spite of the fact that money moved into or out |
| Tracking Investment Income | | | | of certain types of IRAs doesn’ttrigger a tax |
| If your investing is done using tax-deferred | | | | deduction or taxable income, the general rules |
| accounts, such as individual retirementaccounts, | | | | described here stillapply. Even for nondeductible |
| 401(k)s, and other similar investment containers, | | | | IRAs or Roth IRAs, you don’t need to track |
| you don’t need to track theinvestment’s | | | | in-vestment income, dividend income, capital gains, |
| income. The income from tax-deferred | | | | and capital losses for taxrecord keeping using |
| investments stored is not currentlytaxable. The | | | | Money. |
| money you contribute to one of these | | | | Measuring Investment Performance |
| tax-deferred accounts can be countedas a | | | | As identified earlier, the third reason for |
| deduction when the money is transferred into the | | | | investment record keeping concernsinvestment |
| account. Any money youultimately withdraw from | | | | performance measurement. In general, one of the |
| one of these accounts can be counted as income | | | | things you want to dowhen you become serious |
| when youmove money out of the account and | | | | about your investing is calculate how good or how |
| into your regular checking account. | | | | bad aninvestment performs. Complete and |
| For example, if you contribute money to an | | | | accurate investment records force you to |
| individual retirement account by writinga check on | | | | honestlyevaluate your investing. |
| your regular bank account, you can categorize the | | | | One of the ways you measure investment |
| check as “IRA contri-bution” when you | | | | performance is by calculating the annualreturn, or |
| write the check. This categorization lets you easily | | | | yield, produced by the investment. For example, if |
| track the IRAcontribution deduction you will need | | | | you buy a stock for $12a share and later sell it |
| to report on your tax return. Similarly, if | | | | for $18 a share, you should calculate the annual |
| youwithdraw money from an IRA account, all you | | | | return on thestock. |
| need to do is categorize the deposit as | | | | An annual return, or yield, resembles an interest |
| IRA income. This lets you keep track of the IRA | | | | rate. By comparing the return a stockearns to |
| withdrawals you will also need toreport on your | | | | the return provided by other investments, you |
| tax return. | | | | gain a frame of reference andget a better idea of |
| Tracking Capital Gains | | | | whether a particular investment makes sense. |
| As mentioned earlier, realized and unrealized capital | | | | While calculating returns obviously makes sense, |
| gains are often the secondreason for using Money | | | | note that one of the tasks your mutualfunds |
| for investment record keeping. In the case of a | | | | management company does is calculate annual |
| regulartaxable investment account, any time you | | | | returns. Therefore, you don’t needto duplicate |
| buy and then later sell an investment, | | | | this effort. In effect, one of the services you are |
| youexperience a capital gain or loss that needs to | | | | already paying themutual funds management |
| be reported on your tax return. Becausecapital | | | | company for is the calculation of this |
| gains and losses are important for your tax | | | | importantperformance measure. |
| return, when you keep records oftaxable | | | | NOTE Mutual fund management companies |
| investments you want to track these items. You | | | | calculate returns on an annual basis—typically |
| even want to track potential,or unrealized, capital | | | | using the calendar year as the period for which |
| gains and losses. | | | | returns are calculated. |
| However, while tracking unrealized and realized | | | | Your investment holding period may not match |
| capital gains and losses is importantfor taxable | | | | the period for which the returnwas calculated. For |
| investment accounts, you don’t need to do | | | | example, if you hold an investment for one year |
| this for tax-deferred investmentaccounts like | | | | but youryear runs from July 1 to June 30, a |
| individual retirement accounts and 401(k) accounts. | | | | return measure provided by the mutual |
| The reason is simple. | | | | fundcompany may not be useful if the return is |
| For tax-deferred investment accounts, gains and | | | | from January 1 to December 31. |
| losses aren’t taxable. Just as is the casewith | | | | Nevertheless, if you use the prudent mutual fund |
| investment income, inside a tax-deferred | | | | investment strategy—whichis simply to invest |
| investment account, gains and losseshave no | | | | for longer periods, to buy and then hold—the |
| effect on taxable income. Again, the only tax | | | | mutual fundmanagement company’s |
| effect comes from money youmove into and out | | | | performance measurements do give you |
| of the account. In general, money you move into | | | | theinformation you need. |