It’s important to be organized and thoughtful when doing a cleanup, so you don’t throw out important papers that might one day help prove you don’t owe taxes.
Storing financial records doesn’t necessarily involve stacking boxes of records in your closet. Think digitally. You might want to scan some records and store them in digital files, backed up in the cloud. Other crucial information should be stored the old-fashioned way: documents in a file box.
Here’s what to keep and for how long:
Tax records: I recommend saving forever a copy of your tax return and all the supporting documentation of deductions (charitable, mortgage, etc.) and your income information from W-2 and 1099 forms. The IRS has three years to audit for errors and six years to audit if it suspects 25 percent under-reporting of income. But there is no statute of limitations on tax fraud. And your old return might come in handy if you need to prove after-tax IRA contributions or anything else that develops later in life.
Investment records: As long as you own the stock or mutual fund (outside retirement accounts), you’ll want to keep a separate folder demonstrating your purchase price/cost basis. Depending on the laws at the time you sell, you could have a tax benefit for a long-term holding.
Retirement plan statements: These days, much of this information is stored digitally by your employer or plan custodian. However, you should save your year-end statements, especially when you reach age 70 1/2 and are required to take minimum distributions.
Real estate records: You should keep proof of the initial purchase price and any improvements made to the property over the years. That helps determine potential taxes on gains at sale.
Appraisals and purchase invoices for insurance purposes: Some jewelry, silverware and collectibles will be separately “scheduled” on your insurance, beyond your basic homeowner’s coverage, so you need an appraisal. You’ll want to be able to document the cost if they must be replaced in case of a fire or other disaster.
ATM deposit receipts: You should be checking your bank statement online on a regular basis. You should keep deposit receipts until the entry shows up online.
Credit card receipts: Keep these receipts long enough to verify your monthly statement — and in case you need to return a purchase. Keep receipts from deductible expenses, whether business or medical, to justify tax deductions at year-end. And if you use a credit card for business, keep the monthly statement or archive online.
Paycheck stubs: Keep these until you get your W-2 form. You might need to document your monthly income, and they also prove your retirement plan contributions and tax deductions.
Paper files forever
There is some documentation that should be stored in its original paper form and kept forever: copies of birth and death certificates; citizenship papers; marriage and divorce decrees; estate plans; insurance policies; military discharge records; deeds and titles to real estate and property such as cars until they are sold; cemetery deeds; safe deposit box records; and stock or bond certificates that are not held electronically.
Store these documents in a metal box.
You may never need some of these old papers, but if you do, you’ll be glad you used some precious closet space to store them. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and the author of four best-selling books. She responds to questions on her blog at TerrySavage.com.