How Long Should You Keep Your Financial Records?
With tax season in high gear many of us are going through various financial documents. Part of the process, of course, is trying to figure out what to keep — and what belongs in the shredder — when it’s all over. There are companies like ShoeBoxed that can help you keep things organized, but you usually have to pay a fee for the service.
Which Tax and Financial Documents Should I Keep?
Before you go through the effort and cost to preserve a document digitally it can help to know whether you are going to need it. Here are some guidelines for keeping (or throwing out) financial documents.
Documents You Need to Keep for Tax Purposes
Any time you take a tax credit or deduction it is a good idea to have some sort of documentation to back it up. You can keep digital copies of this information if you want, but you should also have originals somewhere. Keep copies of these documents with the copy of your tax return that you hold on to.
These documents can include investment statements, bank statements, 1099s, W-2s, interest statements, receipts for deductible expenses and donations, and other paperwork. Keep a copy of your tax return and your supporting documents for seven years. Unless the issue is tax fraud the statute of limitations on auditing a federal tax return is three years. The government has six years to start legal proceedings or collect if you reported less than 25% of your gross income. (Know, though, that some state returns might have different time windows, so double check before you shred state income tax return supporting documents.)
Get Rid of These Documents Quickly
Unless you are using them for tax purposes the following documents can be shredded after a year (or even immediately):
- Credit card and bank account statements: Shred after reconciling, unless you will need it for a warranty claim.
- Investment statements: Shred quarterly statements when they are replaced by new statements. However, annual statements should be kept until you sell the investment.
- Receipts: Unless you need it for a warranty, or if you think you’ll take something back to the store, these can be shredded as soon as you record them in your personal finance software.
- Most insurance policies: Most insurance policies that are renewed each year (or semi-annually) can be shredded when replaced with the renewed policy.
- Pay stubs: Only keep these until they are reconciled with your W-2 or 1099.
Keep These Documents Longer
There are some documents that you can get rid of as soon as their purposes are fulfilled, but until that time you need to hold onto them. These documents include paperwork for loans, vehicle service records, investment purchases, and savings bonds:
- Loan documents. When the loan is paid off you can shred the documents — but only after you receive the official title or deed.
- Vehicle or boat records. Having maintenance documentation can help you sell the vehicle in the future and back up any warranty claims. After selling a vehicle or boat you can get rid of maintenance records and other documents if the new owner does not want them.
- Investment transaction confirmations. You will need confirmation of investment purchases in order to establish a cost basis for tax purposes. Once you sell the investment your document is moved to join the tax return for the year in which it was sold. If you want to convert paper U.S. savings bonds to an electronic form you can with Treasury Direct.
Keep These Documents Forever
In some cases you will essentially keep your documents forever.
- Life insurance. Life insurance policy documents should be kept until the terms are fulfilled. This means that you should keep these until you die (or until the term ends if you have term life insurance).
- Defined benefit plan documents. These should be kept forever — even those from former employers.
- Estate planning documents. Of course any estate planing documents you have should never be thrown away.
Any documents kept for the long-term should be kept somewhere secure, such as a fire safe, where they cannot be ruined by flood or fire.