Keep What You Need! Shred What You Don't!
Provided by: Sean M. Condon CFP® - Thomas L. Condon, CPA/PFS - Catherine Lapsley, CPA
Ask yourself these important questions. If there was a natural disaster and you had 15 minutes to evacuate your home - would you be able to locate your essential documents in a timely fashion? If you had a flood or fire, would your important financial and personal documents be safe? Do you have them in a fire resistant vault? Or are they electronic stored? If they are electronic, do you have them encrypted and backed up to an external device, or stored with a safe and dependable cloud service or electronic vault? If something happened to you personally, would your friends or family be able to locate your power of attorney, health care proxy, insurance policies, bank accounts, investment accounts, bills to be paid, or important medical information? Do you have piles and piles of boxes and over stuffed filing cabinets in your basement or attic because you’re not sure what to keep and what you should get rid of?
It is important to have a plan for keeping track of your important financial and personal records. With a little bit of time, effort, and a simple strategy, you can have your financial records safe and in order. We recommend that you figure out your own system that works for you. Everyone is different, so use the following guidelines to create your own personal document management system. It’s important to keep what you need, and maybe even more important to shred what you don’t.
We recommend that you divide your financial records into two basic categories: temporary records and permanent records. Temporary records can be further categorized by those that you need to keep for a year or less; those that can be destroyed as you no longer need them; and those you should keep for up to seven years (primarily tax records).
Documents you can keep for a year or less
Monthly Retirement Account Statements
We recommend keeping your monthly and quarterly retirement account statements until you receive and reconcile with your annual statement. You can then shred all the monthly and quarterly statements as they have account numbers and other identifying personal information. It is a good idea to keep all of your annual statements until you close the account, especially if you have any post tax contributions within a retirement account. You should Retain Form 8606s (which report nondeductible contributions to traditional IRAs), and your Form 1099-Rs (which report IRA income distributions).
Monthly Investment Account Statements
Just as with retirement accounts, we recommend keeping your monthly and quarterly investment account statements until you receive and reconcile with your annual statement. With taxable accounts it’s important to keep records on purchases and sales of investments (either keep the statements showing purchases and sales or the confirmations you receive from the custodian). We recommend that you hold onto annual statements until you close the account. If you have a system for storing and backing up electronic documents sign up for electronic statements if your financial institutions offer them.
Receipts, Bank Records, and Bank Statements
You should keep deposit tickets, debit card receipts, and ATM receipts until you are able reconcile them with your monthly bank statements. Then they should all be shredded. We recommend you keep any receipts, bank records or statements needed to prove product warrantees, an important bill being paid, or deductions for your tax records. The rest should be shredded. If you have a concern of being audited, have a pending lawsuit, or divorce it may be wise to keep at least that last three years of bank statements.
Credit-card Receipts and Statements
It is not necessary to keep credit card bills after you've verified and paid them, unless you need them as supporting documentation of a deduction you'll be claiming on your taxes, such as an airline ticket purchased for business travel or a charitable donation. If an item you've purchased is under warranty, keep the credit card bill if you don’t have the purchase receipt until the warranty expires.
Pay stubs can contain personal information such as social security numbers and should be kept in a safe place. It’s a good idea to keep the current calendar year's pay stubs until you verify the information on your W-2, and then shred them. You may need to have up to three months of paystubs if you are applying for or refinancing a loan.
Utility and Household Bills
If you are not claiming home office expenses as a tax deduction, there isn’t really any need to keep these types of records for very long.
Property Insurance Policies
Keep policies that you renew each year, such as those for your home, apartment, car, motorcycle, RV, business, and so on. When you get the new policies; shred the old ones.
Prospectus, Annual Reports and Other Investment Related Information
The financial services industry sure does produce a lot of paperwork. These reports provide information on the investments you hold within your accounts. There is no need to keep these documents and reports once you reviewed them. However, we recommend keeping a copy of the original prospectus if you purchase an annuity. The prospectus among other things outlines all the details of the contract and riders you may have purchased.
Documents to Keep as You Need
Warranties and Other Household paperwork
You can shred warranty information and receipts to prove purchase of a product when the period it covers has expired or you no longer own an item. You may want to keep a household inventory and receipts of major purchases like living room furniture as documentation of household items can help you prove an insurance claim if you ever need to make one. With today’s smart phones and cameras, it’s not a bad idea to make a video recording of your home and contents every few years.
Investment Purchase Confirmations
It’s extremely important to track your cost basis and holding period of non-retirement investments. When you sell the investments you will need this information to calculate gains or losses and whether they are short term or long term as they differ in tax treatment. If this information is reported on your annual account statements, you can simply keep those instead.
Current-year Tax Records
Keeping your records organized will make tax time a lot less taxing. If you travel for work or need to save a lot of receipts and bills, you should keep a log or use a program like quick books or quicken to keep track of everything for tax purposes. You should keep supporting documents for tax returns for at least three from the date your file the return.
You should keep documents for mortgages, car loans, education loans, and other personal loans as long as the property is owned. You can get rid of them after the loan is paid off, but it’s advisable to keep a record of the loan being paid if you still own the property.
We recommend convert savings bonds to registered form (electronic form). You can log onto the Treasury Direct website and get the information you need to convert you bonds to electronic form using the Treasury's SmartExchange program. http://www.treasurydirect.gov./indiv/research/indepth/smartexchangeinfo.htm
Car and Other Personal Property Records
Keep purchase documentation, titles, and registration information for as long as you own the car, motorcycle, RV, boat, or other vehicle.
Home Improvement Records
Keep all home/property improvement records for as long as you own the home/property. Home and investment property improvements increase the basis in the property and you will need these records to prove gains and losses on the sale of real estate investments.
Documents to Hold for Seven Years
The IRS has three years from your filing date to randomly audit your return. The three year period also applies for tax payers who discover an error and chose to file an amended return to claim a refund. The IRS has six years to challenge your tax return, collect the tax or start legal proceedings if they think you have failed to report more than 25 percent of your gross income. There is no time limit if you failed to file a return or if at any time the IRS suspects you of fraud.
After seven years, you may want to keep just the tax returns (not the supporting documents) if you'd like to track your income over the years.
Documents to Keep Permanently
Birth and death certificates, Marriage licenses, Divorce decrees, Social Security cards, cash value life insurance policies, business agreements, Defined-benefit plan documents, Estate-planning documents (such as wills, trusts, health care proxies, and powers of attorney) should all be kept permanently.
Regarding estate planning documents, it’s a good idea to provide your named personal representatives and trustees with a copy. You should also give your primary-care physician and those named to make health decisions on your behalf copies of your signed health-care proxy.
Remember when you toss something into the trash you lose control of it. Be sure to shred documents that have personal information.