How Long Should You Keep Financial Documents?

January 11, 2017

When sorting through paperwork or electronic statements and other records, you may be wondering how long to keep what. Generally speaking, if you can access something online, like a bank account statement, bill or insurance claims letter, you don’t need to keep a paper copy. As long as you’re able to log into an account and download statements, shred the paper (and discontinue receiving paper statements) and reduce clutter.

For other things like receipts and tax returns, a scanned electronic copy also suffices when needed, so if you want to organize your files electronically, have at it. Just make sure you have a secure place to store digital assets like an external hard drive or encrypted cloud-based account. However, there are still a few things that require the originals, such as a will, marriage license, Social Security card, etc. While there are no hard and fast rules for all documents, following are some commonly suggested guidelines for how long you need to keep even the digital copies:

Tax Returns: Seven years is the general rule of thumb for keeping tax returns and the related documentation like W-2s, receipts for charitable donations and other paperwork to support income and deductions claimed. The basis for this is that the IRS has three years to audit your return for any reason from the date of filing. If during an audit, the IRS finds a substantial omission, such as under reporting income by 25% or more, it has six years to challenge your return, so you want to have those documents available to address the challenge.

Life Insurance Policies:  Keep the original policy for the life of the policy plus 3 years.

Medical Records: For medical expenses you paid using a health savings or flexible spending account, you’ll want to keep receipts for up to seven years to show that the funds were spent on qualified expenses in case the IRS audits those accounts. Many HSA or FSA providers allow you to upload receipts for them to track. In that case, you can shred the receipts, but make sure you keep your online access for at least three years after you’ve spent the funds, just in case.

Receipts for Home Improvements: Any remodel projects or improvements that could enhance the value of your home can be added to your basis and possibly reduce any taxable gain when you sell your home, so keep these as long as you own the home for maximum tax savings.

Home Sale Documents: Once you’ve sold a home, you may be tempted to toss all the paperwork you signed back when you bought it, but keep the closing statement that shows you no longer own it in case a future mortgage lender asks for proof or there is any type of future title dispute on your old home.

Bank Statements/Credit Card Statements: Generally, it is recommended that you maintain one year’s worth of statements, unless they are easily accessible online through your bank.  If the statements support tax deductions, they should be maintained for seven years along with your tax files.

Utility Bills: If utility bills support deductions made on your tax return, they should be kept for seven years from the end of the year in which they were claimed. All other bills can be shredded after three months as long as you’ve verified they’ve been paid.

Pay Stubs: If you still receive paper pay statements, keep the latest stub if it contains the year-to-date salary history or keep a year’s worth of stubs until you receive the year-end check that recaps the entire 12 months of pay and the taxes withheld. This is especially important to consider if you’re planning to apply for a mortgage in the coming year so that you can prove your income. Once you receive your W-2 and verify that it matches your pay stubs, you can safely shred your old stubs.

Warranty Documents:  Dispose of these when the warranty expires or you get rid of the item under warranty.

Receipts for Purchases: Once you’ve verified that a charge to your bank account or credit card matches the purchase receipt, you may dispose of the receipt unless you need it for a future merchandise return. Pay special attention to restaurant receipts to ensure that the tip amount you wrote matches the charge to your account. Your receipt will serve as your proof if a wayward server inflates his/her tip.

Investment-Related Paperwork: It’s important to maintain a record of investment purchases in any taxable brokerage account so that you can properly figure any capital gains or losses when you sell. If you have stocks or mutual funds set up for dividend reinvestment, you’ll have multiple purchase transactions to track, so consider making a spreadsheet and keeping the statements as a back-up. You can get rid of any prospectuses you receive though (or sign up for electronic delivery and then delete the email). Investment management companies are required to provide these, but you can always find them online.

Things Not Worth Keeping: User manuals, which you can find online now and ATM receipts.

Things to Keep Forever in a Fireproof Safe or Bank Safety Deposit Box:

• Birth certificates
• Marriage certificates
• Divorce decrees
• Military discharge paperwork
• Certificates of authenticity for any original artwork or other valuable property
• Deed, car title – any document that would be difficult or impossible to replace

Once you determine which records you no longer need to keep, it’s important to properly dispose of them. Shredding the documents before putting them in recycling or the trash will help prevent identity theft. Then go and enjoy your less cluttered life!

 

Like what you’re reading? Sign up to receive my weekly blog posts directly to your email inbox. Go to the blog main page and enter your email address. You can subscribe to all posts or select your favorite topics and authors.