Financial records: keep or shred?

/

Paperwork got you down? Don’t know what you should save and what you can shred? 

If you are still receiving your bills and statements in hard-copy, you probably have file folders and drawers full of documents you don’t know what to do with. And if your transactions are done online, you may not have any back-up documentation at all!

According to the IRS

  • You can be audited for no reason up to three years after you file a tax return, or two years from the date that you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.

  • If you did not report income that you should have reported, and that amount if more than 25% of the gross income shown on your return, then the IRS can audit you up to six years.

  • If you have claimed a loss from worthless securities or bad debt deduction, then the IRS can audit you for up to seven years.

  • If you have filed a fraudulent return or have not filed a return at all, there is no statute of limitations.

 

What to keep and where to keep it

Keep in an accessible place in your home for as long as noted:

  • ATM receipts: Keep until you have verified that the transactions have been correctly recorded by your bank, then shred.
  • Banking statements, cancelled checks: Review for accuracy, note any tax-related expenses, and keep for one year. After you’ve filed your taxes, put any tax-related documentation with your copy of that year’s tax return. Shred everything else.
  • Credit card receipts: Keep until you have verified that the transactions have been correctly reported on your monthly statement. Put tax-related receipts in your current year’s tax file. After you’ve filed your taxes, put these receipts with your copy of that year’s tax return. Keep receipts that are proofs of purchase for any warranty items until the warranty has expired. Shred everything else.
  • Credit card statements, household bills: Review for accuracy, pay, note any tax-related expenses, then keep for one year. After you’ve filed your taxes, put any tax-related documentation with your copy of that year’s tax return. Shred everything else.
  • Home improvement records: Keep records of major home improvement expenses until you sell your home, as you can include them in your home’s adjusted cost basis and reduce the amount of taxable capital gain.
  • Income tax returns and supporting documentation: Keep for a minimum of three years. (See IRS audit parameters above.)
  • Insurance policies: Keep policies that you renew each year until you get the new ones. Shred the old ones.
  • Investment statements:
    • Monthly or quarterly statements: Keep until new one arrives. Shred the old one.
    • Annual statements: Keep until you sell the investments, as you will need to report the original purchase price (including commissions or fees) and any reinvested dividends for purposes of calculating capital gains tax.
    • Records of selling investments: After you’ve filed your taxes, put with your copy of that year’s tax return.
  • IRS Form 5498: This form, sent to you each year that you have contributed to an IRA, identifies the amount of contribution, the type of account (eg, traditional IRA, Roth IRA) and any amounts rolled over or transferred from other types of retirement accounts. Make a separate file for these forms, as you will need to keep them until you begin withdrawing from your IRA. You will want to be able to track any money that you’ve already paid taxes on so that you can avoid paying tax again when the money is distributed.
  • Medical bills: Keep these for at least three years, as sometimes healthcare providers will bill for their services many months (or even years!) after the fact. Transfer relevant data (eg, names and contact information of physicians, types and dates of surgeries or major illnesses) into your medical history file.
  • Medical insurance policies: Keep proof of your health insurance coverage with the appropriate year’s tax return.
  • Paystubs: Keep for one year. After you’ve reconciled them with your W-2, shred them.
  • Real estate sales records: Put sales documentation records in your copy of that year’s tax return.
  • Social security statements: Keep your statement until you get a new one, then shred the old one.

 

Keep in a secure place, indefinitely or as noted:

  • Adoption papers, birth certificates
  • Death certificates
  • Wills, trust documents
  • Life insurance policies
  • Marriage licenses and divorce decrees
  • Military discharge papers
  • Paid mortgage records
  • Property deeds: Keep as long as you own the property.
  • Savings bonds: Keep until you can cash them in.
  • Social security cards
  • Vehicle titles: Keep as long as you own the vehicle.
 

Electronic archives

If you would rather not load up your filing cabinets, you can always scan your documents and archive them electronically. Remember that some documents will still need to be kept in paper, such as contracts or legal documents with original signatures, passports, and birth certificates.

 

If you scan your records

  • Scan in a universal format, such as pdf. To ensure that the files will always be viewable, include a copy of Acrobat Reader on your scanned archives. Scanning at 200 dots per inch will provide good resolution and won’t make the scanned files too large.
  • Name your scanned files with the appropriate date and good, descriptive titles.
  • Make backups and keep them safe! Back up your scanned files, label the backup disks, and keep in a secured location, such as a safe-deposit box.