It is always a relief to get your tax return filed and satisfy Uncle Sam for another year. But what about all of the tax documents and records you painstakingly pulled together to prepare the return? And what about all of the other “financial stuff” you have been keeping. Do you really need to keep all of that? The answer is “yes” and “no”…
There are two things to consider when determining what to save and what can be discarded. The first is whether or not you will ever need that information in the future (and for how long). The second thing to consider is how to securely store what needs to be retained and dispose of what you can toss.
A good organizational system will tackle the first issue (what to save and for how long) in a very systematic way. It may seem painful to set up this system initially, but once it is done and if maintained regularly, you can rest assured that whatever you need will be readily and easily accessible.
The documents you need to retain should be filed into four categories:
There are some items that are difficult to reproduce if you don’t save them and others that may be important for a long period of time. These would include:
– Birth and death certificates
– Marriage licenses
– Divorce decrees
– Legal documents (your attorney will generally keep the original signed estate planning documents but you should retain a copy)
– Social security card
– Military discharge papers
– Life, disability and long-term care insurance policies
– Loan documents (at least until the loan is paid off but preferably indefinitely along with the letter from the lender indicating the debt is paid in full)
– Property records for your home (including closing paperwork, loan documents and all documentation regarding any improvements to the home)
– Car title (until you sell the vehicle)
Keep for 7 Years
You may have heard that the IRS may audit your tax return as far back as 7 years ago. Generally, audits don’t go back more than 3 years however if a significant error is found, additional years may be added to an audit resulting in the 7-year rule of thumb. Items to retain are:
– Tax returns
– Record of estimated tax payments made over those years
– W-2’s, 1099’s, K-1’s and any other tax reporting documents
– 529 account contributions and distributions along with documentation for each
– Charitable donation receipts
– Property tax bills
– Mortgage statements
– Receipts for any other deductions taken
Keep for 1 Year
These are items that you may need to refer back to over the course of the year but will not need over the long run. They would include:
– Monthly bank statements
– Monthly brokerage account statements
– Credit card bills (make sure to review these carefully upon receipt to ensure accuracy and if there is an item that is tax-related, that particular bill should be retained using the 7-year rule)
– Pay stubs (you should also compare your EOY paystub with your W-2 each year to ensure they match)
Keep for 1 Month
These are receipts and other documents that are needed only to verify the accuracy of the bills that you are receiving and paying each month. Things to keep for just 30 days are:
– ATM and bank deposit slips (to compare to your monthly bank statement)
– Monthly bills (to compare to the next bill to ensure that the previous payment was properly credited)
So, what is the best way to retain these records and dispose of what can be tossed? Information security is paramount for document retention and disposal.
For physical documents, designate a safe, out-of-the-way place in your home that is protected from damage (fire, water, etc.) or theft. A home safe is a good place to secure these types of physical documents. Make sure to store the combination to the safe in a secure location.
For digital records, all files should be password protected. Make sure to back up all electronic records on a regular basis. Passwords should be complex and changed periodically. Make sure your computer is protected with antivirus software which is up-to-date. You may also want to consider backing your digital records up to the cloud. However, you need to make sure that the cloud storage provider uses encryption technology that is secure.
When disposing of financial records, shredding is essential. Purchasing a shredder for your home is a good investment to keep your documents secure. If you do not have a shredder at home, many office supply stores will provide this service but beware that there will be a fee charged for that service. Anything with an account number or any kind of identifying information should be shredded. In this age of identity theft and privacy concerns, the way you dispose of financial documents is critical.
Mark Twain once said, “The secret of getting ahead is getting started”. How true that is. Organizing financial documents may seem like a daunting task at first but once you get your system set up, the time spent looking for documents will be dramatically reduced and your “paper clutter” will be gone. Even more importantly, next year when you are pulling together your tax information, it will be a snap! Organizing really does pay big dividends when it comes to your financial wellbeing.
Please call your advisor at AFA if you have questions on this or any other matters. We are always happy to help!