Last weekend it rained cats and dogs, so instead of enjoying a sunny summer day, I went into the basement to clean out the mountain of boxes and bins that had piled up, filled with my financial paperwork. I pulled up a chair and started opening boxes and looking through all of the documents: a decade of of tax returns, shoe boxes bursting with receipts, and stacks of bank statements spanning back a decade. “Why hadn’t I thrown some of this out before?” I asked myself as I unpacked it all and tried to form organized piles of paper without causing a fire hazard. Even though it was overwhelming it desperately needed to be addressed so I did the right thing: I stuffed it all back into the boxes in a big mess, closed the lid, and went upstairs to watch a baseball game on the couch.
Coming from the category of “Do what I say, not what I do,” I’m recommending that you clean out your financial documents regularly, so you aren’t faced with the same tornado of paperwork years down the road. But many people are afraid they’ll destroy an important financial document and need it later on for an audit or other purposes. So what documents are safe to throw out, and when?
Since a lot of paperwork is needed for tax filing purposes, let’s first check in with the Internal Revenue Service and see what they recommend.
The IRS:
-The IRS has three years from the filing date to audit a return if it suspects a good-faith error.
-That three-year rule also applies if you, the taxpayer, finds an error and wants to file an amendment.
-However, the IRS does has up to six years to call you on the carpet if it suspects you underreported your gross income by 25% or more, and there is no limit on fraud.
-Keep your state and federal tax returns for six years.
Investments:
-If you made a nondeductible contribution to an IRA, keep the records indefinitely.
-Keep your quarterly statements for a 401(k) or other plan until you receive and check over your annual summary. Keep those annual summaries until you retire or close your accounts.
-Same thing for mutual funds, check for accuracy and then keep only the annual statement.
Bank records.
-Every month balance your checkbook and review your bank statements for accuracy.
-Once a year, go through your check stubs/copies each year, keeping only those big ones related to taxes, business expenses, home improvement, etc. You can shred the smaller ones, or just keep them all together cataloged by year.
-If your bank issues an annual report with ALL of your transactions itemized, it’s ok to shred the statements. Keep the report or records for at least 3 years.
Bills.
- When you receive bills for phone, cable, utilities, etc. every month, rectify them against your bank statements to make sure they’re correct, then it’s ok to shred.
-If they issue a final statement then you can just keep for three years for tax purposes.
Real estate.
-Keep all important real estate records permanently, especially transaction documents, disclosures, and receipts for major improvements.
-Keep your mortgage statements only until you receive your yearly summary, and then keep those for seven years.
Business expenses.
-Keep business receipts for seven years if they are tax-documented expenses.
-Keep payroll records permanently, partnership agreements, and other important documents permanently.
Pay Stubs.
- Reconcile your pay stubs with your W2 once it’s issued, and then shred the stubs.
Charity.
-Keep receipts for charitable contributions for three years.
Credit cards.
-Keep all credit card statements for seven years
Medical records.
Keep medical records and insurance documents for five years.
I hope this helps you get your financial house – or basement – in order. Remember to shred documents – not just throw them in the trash, to avoid the risk of identity theft. If in doubt scan a copy (or take a quick picture – my version of the poor man’s scanner) and save those on a CD or flash drive if you want to be sure.
Now go enjoy your summer!
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