February 2, 2015
If there’s one time of the year that may inspire you to finally come up with a filing system for all of your bank statements, receipts and other important documents, it’s tax season. Not only will keeping your documents organized make it easier and less stressful for you to find what you need on a daily basis (and when you are getting ready to have your taxes prepared), it will also ensure that if something happens to you, your loved ones will be able to quickly find essential information about your finances and other relevant items.
One of the major challenges that many people encounter when they start going through their documents is knowing what they should keep and for how long. The following list from Consumer Reports may help you determine what to keep and what to toss (remember to shred all sensitive documents before you put them in the recycling bin or trash) once tax season is over:
Documents to keep for a year or less
- Bank records: Keep deposit and ATM receipts until you reconcile them with your monthly statements. File your monthly checking and savings account statements. After you do your taxes, file any statements needed to prove deductions with your tax records; the rest can be shredded.
- Credit-card bills: Shred them after you've checked and paid them, unless you need a bill to support a deduction you'll be taking on your taxes, such as for a charitable donation (in which case you'll need to file the bill with your current-year tax records).
- Current-year tax records: Keeping your records organized can save you headaches and money at tax time. Place documents you'll need for your next return in a file.
- Insurance policies: Keep policies that you renew each year, such as those for your home, apartment, or car, until you get new policies, then shred the old ones.
- Investment statements: You can shred your monthly and quarterly statements from brokerage, 401(k), IRA, Keogh, and other investment accounts as new ones arrive. But hold on to annual statements until you sell the investments.
- Pay stubs: Keep the calendar year's records until you reconcile them with your annual W-2 form, then shred them.
- Receipts: If you're not doing anything with your receipts—like tracking your spending, itemizing tax deductions, or using them to return purchases—you don’t need to keep them.
Documents to keep for at least a year
- Investment purchase confirmations: You will need these to establish your cost basis and holding period when you sell investments. If this information appears on your annual statements, you can keep those instead of quarterly or monthly statements. Store the records until you sell the investments, at which time you should move the back-up records into that year's tax-return file.
- Loan documents: Keep closing documents for mortgage, vehicle, student, and other loans in a safe-deposit box. You can dispose of them after the loan is paid off.
Documents to archive for seven years
- Personal federal and state tax returns and their supporting records: These documents must be kept for at least seven years. Remember, your returns can be audited by the IRS up to three years after the date you filed the return. If you fail to report more than 25 percent of your gross income, the government has six years to collect the tax or start legal proceedings—and you can be audited at any time if the IRS suspects you of fraud.
- Tax records: If they are more than seven years old, tax records can be stored—or even better scanned—for your records.
Documents to keep indefinitely
- Essential records such as birth and death certificates, marriage licenses, divorce decrees, Social Security cards, and military discharge papers should be kept in a safe-deposit box.
- Permanent life insurance: Policies that have a cash value or investment component—keep documents and a list of the companies that issued them and their phone numbers in your safe-deposit box. If you have a term life policy, hold the documents until the term is over, then toss them.
- Pension-plan: Documents from your current and former employers and estate-planning documents including wills, trusts, and powers of attorney should also be stored in your safe-deposit box.
If you’ve already instituted a filing system for your key documents, kudos to you. If you haven’t, now is the perfect time to do so. If you have any questions about which financial records you need to keep or which ones you can safely dispose of, please let us know, we are happy to help.