Banking and Finance

Banking and Finance  » When to use Microsoft Money for Mutual Fund Recordkeeping

When to use Microsoft Money for Mutual Fund Recordkeeping

While you might assume any mutual fund investor should use

Money's mutual fund record-keeping tools, that isn't the case.

Because investment record keeping, including mutual fund record

keeping, requires significant work and involves complexity, you

need to make sure the effort is worth it.

In general, you keep investment records for any of the following

reasons:

Reason 1: You want to track interest and dividend income.

Reason 2: You want to track realized and unrealized capital

gains and losses.

Reason 3: You want to measure or grade the profitability of an

investment by calculating its annual return or yield.

Obviously, all three of the tasks in the preceding list sound

worthwhile, but many investors won't need to use Money's

record-keeping tools to get this sort of information.

Tracking Investment Income

If your investing is done using tax-deferred accounts, such as

individual retirement accounts, 401(k)s, and other similar

investment containers, you don't need to track the investment's

income. The income from tax-deferred investments stored is not

currently taxable. The money you contribute to one of these

tax-deferred accounts can be counted as a deduction when the

money is transferred into the account. Any money you ultimately

withdraw from one of these accounts can be counted as income

when you move money out of the account and into your regular

checking account.

For example, if you contribute money to an individual retirement

account by writing a check on your regular bank account, you can

categorize the check as "IRA contribution" when you write the

check. This categorization lets you easily track the IRA

contribution deduction you will need to report on your tax

return. Similarly, if you withdraw money from an IRA account,

all you need to do is categorize the deposit as IRA income. This

lets you keep track of the IRA withdrawals you will also need to

report on your tax return.

Tracking Capital Gains

As mentioned earlier, realized and unrealized capital gains are

often the second reason for using Money for investment record

keeping. In the case of a regular taxable investment account,

any time you buy and then later sell an investment, you

experience a capital gain or loss that needs to be reported on

your tax return. Because capital gains and losses are important

for your tax return, when you keep records of taxable

investments you want to track these items. You even want to

track potential, or unrealized, capital gains and losses.

However, while tracking unrealized and realized capital gains

and losses is important for taxable investment accounts, you

don't need to do this for tax-deferred investment accounts like

individual retirement accounts and 401(k) accounts. The reason

is simple. For tax-deferred investment accounts, gains and

losses aren't taxable. Just as is the case with investment

income, inside a tax-deferred investment account, gains and

losses have no effect on taxable income. Again, the only tax

effect comes from money you move into and out of the account. In

general, money you move into the account is a deduction for

purposes of calculating your taxable income. Money you move out

of your account is an income amount for purposes of calculating

your income tax return.

The general rule described in the preceding paragraph--that

money moved into and out of a tax-deferred investment account is

what produces a tax deduction or taxable income amount--is true.

However, predictably, some tax-deferred investment accounts

don't work this way. There are, for example, nondeductible IRA

accounts.

A nondeductible IRA account doesn't give the taxpayer a

deduction merely for moving money into the account. Also, a Roth

IRA account doesn't actually produce any taxable income just

because you move money out of the account. The primary benefit

of a Roth IRA is that you get to withdraw money from the IRA

without including the withdrawal on your tax return.

However, in spite of the fact that money moved into certain

types of IRAs or out of certain types of IRAs doesn't trigger a

tax deduction or taxable income, the general rules described

here still apply. Even for nondeductible IRAs or Roth IRAs, you

don't need to track investment income, dividend income, capital

gains, and capital losses for tax record-keeping using Money.

Measuring Investment Performance

As identified earlier, the third reason for investment record

Today's Popular Articles

• Managing Money in today's Time

• Choosing Your Financial Advisor

keeping concerns investment performance measurement. In general,

one of the things you want to do when you become serious about

your investing is calculate how good or how bad an investment

performs. Complete and accurate investment records force you to

honestly evaluate your investing.

One of the ways you measure investment performance is by

calculating the annual return, or yield, produced by the

investment. For example, if you buy a stock for $12 a share and

later sell it for $18 a share, you should calculate the annual

return on the stock. An annual return, or yield, resembles an

interest rate. By comparing the return a stock earns to the

return provided by other investments, you gain a frame of

reference and get a better idea of whether a particular

investment makes sense.

While calculating returns obviously makes sense, note that one

of the tasks your mutual funds management company does is

calculate annual returns. Therefore, you don't need to duplicate

this effort. In effect, one of the services you are already

paying the mutual funds management company for is the

calculation of this important performance measure.

Mutual fund management companies calculate returns on an annual

basis--typically using the calendar year as the period for which

returns are calculated. Your investment holding period may not

match the period for which the return was calculated. For

example, if you hold an investment for one year but your year

runs from July 1 to June 30, a return measure provided by the

mutual fund company may not be useful if the return is from

January 1 to December 31. Nevertheless, if you use the prudent

mutual fund investment strategy--which is simply to invest for

longer periods, to buy and then hold--the mutual fund management

company's performance measurements do give you the information

you need.

About the author:

Seattle

CPA & author Stephen L. Nelson wrote the Microsoft Money

Guide to Personal Finance, Quicken for Dummies and more than 100

other books as well. Nelson holds an MBA in Finance and an MS in

taxation. His web site is http://www.stephenlnelson.com