Determining whether to keep or shred financial documents can be confusing – use our simple guide to get started.
Every year, it’s nice to do a bit of “financial spring cleaning” and declutter your filing cabinet, desk drawers, and the various hiding places where miscellaneous scraps of paper tend to accumulate and multiply. Here’s what you need to know:
Keep Or Toss
Keep Forever
If you’re long overdue for some organization in the paperwork department, start here! This category includes all the super important life stuff that’s usually issued to you only once and therefore difficult to replace:
- Birth and death certificates
- Social Security cards and ID cards (even expired versions)
- Passports (even expired versions)
- Marriage licenses and divorce decrees
- Adoption papers
- Copies of wills, trusts, and powers of attorney
- Adoption papers
- Records of paid mortgages
- Safe-deposit box inventory
- Military records
- Retirement and pension plans
Your “keep forever” documents should be kept in a secure place. A locking file cabinet in your home is a popular choice but consider upgrading to a safer alternative – such as a fireproof safe in your home or a safe-deposit box at your credit union or bank. Also, consider scanning these documents and having them backed up on the cloud – password protected, of course – so you can access them remotely and quickly in an emergency.
Keep For Seven Years
- Income tax returns
- Any forms that support income or a deduction on your tax return (e.g., receipts, canceled checks, W-2 forms)
- Records of selling a house or stock (documentation for capital gains tax)
- Records of paid-out loans
- Records of sold investments
- Mortgage documents
- Medical records (including prescriptions and health insurance information)
This category includes all supporting documents for your income tax return, plus a couple of other miscellaneous ones. This may seem like a long period of time, but it’s not an arbitrary number – seven years is how far back the IRS can go to audit a tax return. The breakdown is a little more complex; you can be audited for any reason up to three years after you file a tax return and up to six years after you file a tax return if you omitted 25% or more of your gross income – which technically makes the auditing window three to seven years.
An audit is an evaluation of your tax return to verify its accuracy and to ensure compliance with tax laws. Many people associate being audited with having committed tax fraud or some other dishonest financial behavior, but, in fact, some taxpayers are audited on a random basis each year.
If audited, you’re required by law to provide the documentation that supports the claims made in your tax return. In some cases, additional information may be required to verify a claim you’ve made – it might just be a matter of providing a canceled check, a receipt, or a bank statement. In other instances, the audit may take place on-site, meaning at your residence or workplace, or at an IRS office. Being well-organized is the best way to make the process as quick and painless as possible.
Keep For One Year
- Bank and credit card statements
- Pay stubs
- Quarterly investment statements
- Receipts for large purchases
- Canceled checks
- Paid medical bills
This category mostly consists of monthly statements. A good rule of thumb is to keep your monthly statements for the current year, and then shred them once you’ve reconciled them with an annual statement. The exception is any statement needed for tax purposes – those get grouped into the “keep for seven years” category.
Keep For 30 Days Or Less
- ATM slips
- Utility and phone bills
ATM slips can be tossed once you’ve checked them against your monthly bank statement. Utility bills and phone bills can be shredded after you’ve paid them unless they contain tax-deductible expenses.
Keep While You Own
This bonus category is a catch-all for agreements and contracts that are active for varied amounts of time:
- Warranty information
- Insurance documents
- Vehicle titles and loan documents
- House and mortgage documents
- Pension records/retirement plans
You’ll want to hang on to the records in this category for at least as long as you own the asset. For major purchases, stapling the original purchase receipt to the user manual or warranty information will keep everything in the same spot, should you need to make a warranty claim. Documents relating to improvements and upgrades on your home or vehicle should also be saved alongside your title and loan papers.
Summary
Sorting through financial documents is a straightforward process once you figure out how long you need to keep specific types of documents. Doing a periodic cleanup will help keep your documents organized and decluttered in the event you need to access them.
