During the tax season we are forced to address paperwork we have collected since it is necessary to gather all the required paperwork to prepare taxes. This might also be a good time to deal with a lot of the financial paperwork that may be stored away in who-knows-where locations from drawers to boxes or worse.
Hanging on to Too Much or Too Little
For many of us who are afraid to throw things away because we might need it later, one result is that we hang onto all of our financial paperwork forever and it takes up more and more space. My father was like this, and when going through his records, I found that he had paperwork for three life insurance contracts – and none of them were valid anymore! The obvious lesson is that if it is no longer valid, one should probably throw it away. One technique I use is when a folder of paperwork becomes inactive, I write a future “shred after” date on it. That way when I go through my files, if one of those dates has passed, I know I can safety toss the whole folder into the box that goes to the shredder.
But what if you are in the opposite situation and you throw everything away as soon as you are done with it? You want to make sure you hang onto the essential paperwork you need to keep around for tax justification and thus should not be so quick to throw it out.
Of course, one solution is to scan documents and keep the data on a computer rather than in paper files. Or use paperless document options and access them online. If you do this, remember to download these regularly, as many companies will only keep your monthly information online for two years or less. You may already be doing this if you get paperless statements and invoices and just download the documents to your computer. But this can come with its own problems as you have to keep backing up that data or copy it every time you get new technology.
How Long to Keep Those Records?
Regardless of your method, the question you want answered is how long should you hang onto paperwork? The answer is: it depends. Here are some guidelines if you want to make sure you have what you might need, but don’t want to keep the whole house (or computer) cluttered with unnecessary paperwork.
- You should keep tax return items for seven years. That includes the return itself, as well as cancelled checks, brokerage year-end forms, and any other receipt or document used to create/justify the tax return items. After seven years, just keep the return itself and shred all the associated justification materials. The IRS can audit you further back than seven years if it suspects fraud, but if that is the case, you probably have bigger problems than paper documentation!
- You should keep any post-tax contributions to an IRA around until the IRA is completely distributed to show you’ve already paid taxes on part of the IRA balance.
- For other retirement plan or savings plans, keep the monthly or quarterly statements until the year-end statement comes out, then you can shred the monthly or quarterly statements. Keep the year-end statements for as long as you have the account open.
- For checking accounts, keep these for a year and then go through what you’ve kept and make sure you keep the ones related to taxes, any business related, home improvements and mortgage payments. If it is needed for tax return justification, you may want to print copies of cashed checks if they are not on your statements already. If they are available online only, then often these are only available for 90 days so you’ll need to do this throughout the year. If you use online bill pay, keep the statements showing those payments. Anything else not of lasting value or interest you can shred. If you’ve purchased something that has significant value (jewelry, rugs, antiques, cars, collectibles, furniture, etc.) keep these receipts for as long as you own the item as these can help in case of insurance claims to document current value based on purchase date and value.
- For investment brokerage accounts, keep all of the buy and sell documents of the individual assets to show the buy and sell prices. As of 2012, brokerages are required to keep track of this in their paperwork, and you’ll want to keep the year-end statement (usually December statement) which should have all year-to-date transactions on it. Keep these for seven years after you’ve sold a stock or mutual fund listed that year.
- When it comes to credit cards or debit cards, keep the original receipts until the monthly statement comes and then you can shred the receipts if they match up to the statement, and just keep the statement. You will want to keep receipts for things that have a warranty or return period until that period has expired. You’ll also want to keep any statements for seven years that have documented tax-related expenses on them. Otherwise, you don’t need to keep the statements longer than about a year.
- When you get a pay stub, keep these for the calendar year until you get the W-2. The W-2 should match up with what the pay stub statements say. If they do, then you can shred the pay stubs. If they don’t, ask your employer for a corrected W-2 based on your pay stub information.
- For house- or condo-related documentation, keep all information documenting the purchase price as well as receipts for improvements such as remodels, additions or installations done to the house or condo. Keep all records associated with selling the property as well including all fees, commissions and legal fees for six years after you sell the property.
- Medical documents are an interesting category as they can be either financial or medical. The financial-related receipts should be kept for the seven-year period needed for tax purposes. You may want to keep lab reports, notes, and other health-related documentation you might get for as long as you are alive as a health archive. Even though doctor’s offices should have the information, documents you have may assist with your care if historical information is needed. Indeed, if you have any hereditary health issues, these records could be useful to your children as well.
Regular Paperwork Management Keeps it to a Reasonable Effort
While the above may seem overwhelming, the key is to take it in smaller chunks and work on a particular type of documentation. For example, pick just one of the bullet points from the list to de-clutter and then reward yourself by doing something fun.
Another option is to hire a daily money manager to help you with the task. They are familiar with what needs to be kept and what can be shredded so can get through the task quickly. This takes that ominous task off your plate.
Once the big job is taken care of, taking some time each year to just handle the previous year will take a lot less time and can likely be done in an afternoon.