Brown Bagger
This section is set up to provide a ready-made Brown Bag Session for you to use with employees and/or managers. Use as is, or adapt this information for a general employee group. You may reproduce as many copies as needed.
Tax Time Tips: Papers You Should Keep; What the New Pension Act Means
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ho doesn’t feel like they’re drowning in paper? Receipts, bills, deeds, tax returns, paycheck stubs, the list goes on and on. We keep them because we’re too afraid to throw them away. You never know when you might need them, and there’s always the threat of identity theft that makes people think twice before tossing things. We may be keeping these papers, but many of us aren’t organizing them in a way that can be retrieved quickly when needed. If you’re like many Americans, the task is so overwhelming that you quickly give up in favor of an easier job. According to Jim Lange, attorney, CPA, and author of Retire Secure! Pay Taxes Later: The Key to Making Your Money Last as Long as You Do, knowing the time frame for keeping certain documents is the first step to getting organized. And the tax season is a great time to get organized, Lange suggests. “You will save yourself a lot of headaches with just a little bit of organization,” he says. “The best way to get organized is to start going through all of those important papers that have been piling up all year.” Lange has compiled a summary of tax and accounting documents with rough guidelines of how long you should keep them. (See also the handout section on page 4.) Keep either list posted somewhere, preferably where it won’t get buried: • Documents you never want to part with. Most people are aware that some documents should be kept for life — birth certificates, marriage licenses, insurance polices, and wills, for example. Then there are others that people know are important, like tax returns, but they aren’t sure what their shelf life should be. The bottom line — keep them all. According to Lange, documents like these don’t need to be readily accessible, but they should be kept in a safe place, like a safety deposit box at a local bank.
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• Records that should go out with the old. This category involves documents such as house deeds and car titles. The general rule is that you should keep all paperwork as long as you’re responsible for the item related to the document. While these papers are important, if you sell your house, you’ll have a new deed so don’t let an old one clog up a filing cabinet. • Records with a seven-year itch. These are documents that you can get rid of after seven years. File these by date to ensure you don’t keep them longer than necessary. Examples of these documents include canceled checks; receipts with tax implications, alimony, charitable contributions, mortgage interest, and retirement plan contributions; and credit card statements, if tax-related expenses are documented. • Records you can toss. Generally the fastestgrowing piles of documents are the records that should be purged at the end of every year. These include quarterly statements of retirement plans, bank statements, and bills with no long-term tax importance. “It’s silly to keep them indefinitely,” Lange says. “After a year, they become trash. Just remember, with the increasing threat of identity theft — shredding, rather than tossing, is the way to go.” Exercise: What records do YOU need to keep? Do YOU know which ones to shred? Do you still have questions? (See also the overview in the handout section on page 4.)
Are Your Documents Organized? Even if you know which papers to keep and which ones you can get rid of, there will still be a lot of important documents to manage. What’s the best way to keep everything organized? Make EA Report Brown Bagger 1
Brown Bagger electronic back-up copies of all paper documents by scanning them into your computer and saving the file to one of those handy portable memory sticks (like a flash drive). “Then, in the event of an emergency you can simply grab that little memory stick and know that you will have numbers and records at your disposal,” Lange says. “The sticks are also a great place to store your information for online accounts. Some of the larger-capacity memory sticks also come with password protection so you don’t have to worry about other people getting access to your information.” As well as an electronic back-up, be sure to keep hard copies of important documents in a fire-proof storage box, Lange notes. “The bestcase scenario would have you saving information both electronically and in hard-copy form,” he recommends. “Either way, be sure to develop a filing system that is easy to use. If your system is too complicated, you won’t keep it up. Once you’re organized, you will be thrilled with the peace of mind that comes with knowing you have all of your important documents organized and they are ready anytime you need them.” Exercise: Are your important documents backed up electronically? If not, what resources would you need to accomplish this task? Are your vital documents stored in a fire-proof container?
What the New ‘Pension Protection’ Act Means for Your Future If you think the law that Congress recently passed “shores up your golden years,” think again. Despite its name, the only “protection” that workers have is a fierce determination to provide for their own futures. In fact, most financial experts believe that the Pension Protection Act of 2006 is, at best, a band-aid on the problem. Indeed, retirement plan expert Jim Lange notes that the new law, which requires most pension plans to become fully funded over a seven-year period, is the legislative equivalent of “destroying the village in order to save it.” When cash-strapped companies are forced to comply, 2 EA Report Brown Bagger
they will almost certainly abandon or freeze existing plans. The bottom line, according to Lange, is that YOU and only you are responsible for funding your retirement. As corporate icons declare pension freezes, workers need to re-evaluate their retirement plans. The new law is designed to protect not only employees, but also the Pension Benefit Guarantee Corporation (PBGC), the last-resort pension provider that steps in when companies renege on their promises. The PBGC is ultimately funded by — who else? — American taxpayers. If enough companies fail to fund their pensions, the potential bailout could make the savings and loan bailout look like chump change. The new law is enormous — nearly 1,000 pages that cover 100 tax revisions. The average taxpayer probably wonders, “After cutting through the obscure points and mountains of legalese, how will the ‘Pension Protection Act of 2006’ impact me?” Lange offers some insights: • Employees must make the huge psychological shift from “someone will take care of me” to “I must take care of myself.” As more employers decide to terminate their defined benefit plans, employees who had been participants in the plan will be at risk for losing their pensions (worst-case scenario) or reduced pensions (best-case scenario). New employees would be required to participate in defined contribution plans, which transfer greater responsibility to the employee to save for retirement and assume all of the investment risk. And if there is no employer matching for the defined contribution plan, the total responsibility of the saving for retirement falls on the employee. And this is at a time when statistics show that the average person is already not saving adequately! • Employees must save as much as possible for their retirement years. With the shift from defined benefit plans to defined contribution plans, employees must learn that it is critical to fund their Roth 401(k)s (if available), 401(k)s, Roth IRAs, or tradiApril 2007
tional IRAs (if eligible) and other retirement plans to the max. “A second component of the new law is that employers are permitted to educate their employees on their retirement investment options and on the risks/benefits associated with ‘being in the market,’”Lange notes. (Editor’s note: The EAP can provide a valuable service by leading, or referring, a workplace seminar on this topic.) • Contributing to your retirement plan is now “automatic.” The new law makes it easier for employers to automatically enroll their employees in the company’s 401(k) plan. The company would set default contribution limits and the employee would have to “opt out” should he/she (unwisely) decide to not participate. “This is one way to address the problem of employees not having a safety net for retirement,” Lange says. “It would ensure that [at least] some retirement saving is occur[ring] — again with the risks/benefits of ‘being in the market’ falling on the employee.” • Here’s the good news — it just got a lot easier to save for retirement. On the plus side, the new law makes permanent incredible income tax-saving vehicles that will allow taxpayers to make larger IRA, Roth IRA, Roth 401(k) and other retirement plan contributions. Prior to the law’s signing, some of the contribution limits and other provisions were due to expire in 2010. Since these laws are now permanent, taxpayers can confidently make retirement and estate planning decisions to secure their (and their family’s) future. Points to consider include: • Higher Roth IRA or IRA contributions of $4,000 per year, $5,000 in 2008 and higher amounts adjusted for inflation after that; • Higher elective deferral amounts to 401(k) and 403(b) plans of $15,000; • Catch-up contributions for workers 50 and older of $1,000 for IRAs and $5,000 for 401(k) and 403(b) plans;
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Brown Bagger • Faster 3- or 6-year vesting schedules on employer-matching contributions; • Roth 401(k) and 403(b) plans are permanent; and • For lower-income taxpayers, the Saver’s Credit, which would have expired at the end of 2006, has also been made permanent. “Even though most people probably didn’t even realize some of these laws were set to expire, their benefits package has likely been affected by the uncertainty,” Lange explains. “For instance, many companies have never put the Roth 401(k) and 403(b) plans on their menu of options since they didn’t know if they’d have to pull them off again in a few years. Now, employers have an incentive to offer them.” Even if you are one of the workers who never had a pension to lose, Lange advises buying into the “self-reliance” theme embodied in the new law. “You must take decisive action to shore up your retirement savings,” he urges. “Sit down with a qualified retirement planning expert and plot out a reasonable, long-term strategy that depends, for the most part, on your ability to maximize your retirement assets. If you fail to take the responsibility for your retirement security onto your own shoulders, you are seriously endangering your ‘golden years.’ The tide is turning toward self-reliance, and those who don’t go with it will be swept away.” Exercise: Does your manager/employer understand the tax implications of the “Pension Protection Act of 2006?” How would YOU answer the following statements: “I regularly save money.” “I have short-term financial goals for retirement.” “I have long-term financial goals for retirement.”
Jim Lange, CPA, attorney, is a nationally recognized IRA, 401(k) and retirement plan expert. “Retire Secure! Pay Taxes Later: The Key to Making Your Money Last as Long as You Do,” lists for $24.95 (Wiley, ISBN: 0-470-04354-7). His website, www.rothira-advisor.com is consistently in the top 10 sites when you Google “Roth IRA.” EA Report Brown Bagger 3
Brown Bagger H A N D O U T What to Keep and What to Shred: A Quick Guide Documents to Keep for Life: Tax-related: • Copies of 1040 tax returns with W-2 stapled to the form (may be useful for correcting errors in Social Security earnings if mistakes are made); • Tax/legal/bank/insurance correspondence; • Non-deductible IRA contributions; • Year-end financial statements (helpful for long-term tracking); • Important notices/plan amendments for IRA and retirement savings; and • Cost and/or basis of investments either bought, inherited, or received as a gift. Life- and home-related: • Birth certificates; • Marriage licenses; • Divorce papers; • Death certificates; • Military records; • Copies of your will, Power of Attorney, etc.; • Insurance claims/policies; • Major debt repayment records; • Loan/mortgage papers; and • Updated household inventory. Documents to Keep as Long as You Own a Certain Item: • Deed to house; • Home improvement records (keep for seven years after sale) and escrow closing documents; • Car title and purchase papers or lease agreement; • Bills for major purchases; • Cost and/or basis of investments either bought, inherited, or received as a gift until sold, donated, etc.; and • Tax-related assets until the period of limitations expires. Documents to Keep for One Year: • Quarterly statements of retirement plans, IRA, etc. (For accuracy purposes, check at the end of the year against your annual statement. Keep the annual; shred the quarterly.) • Bank records with no long-term importance; and • Bills (with no tax-related implications) — once the check has cleared, bills can be shredded, but you might want to keep the bill for one year. Documents to Discard after Seven Years: • Tax write-off related to worthless securities and non-business bad debts; • Bank records related to taxes and business expenses; • Paycheck stubs that reflect additional tax deductions (e.g. charitable contributions); • Canceled checks/receipts with tax implications (alimony, mortgage interest, charitable contributions, and retirement plan contributions); and • Credit card statements if they reflect tax-related expenses. Source: Jim Lange, author of “Retire Secure! Pay Taxes Later: The Key to Making Your Money Last as Long as You Do,” $24.95, Wiley, ISBN: 0-470-04354-7.
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