Recordkeeping is an art form – it is vital to have records stored and accessible in case you need them, but if you never throw anything away, you risk appearing on a television show featuring hoarders. How do you strike the proper balance on what to keep and for how long?
Obviously important documents such as your birth certificate, social security card, marriage certificate, passports, educational/military records, and wills should never be discarded. Here are a few suggestions regarding the rest.
- Tax Records – Keep returns for seven years. Generally, amended returns and IRS follow-up on good faith errors must take place within three years, but in cases where the IRS suspects significant underreporting of income (25% or greater), they can challenge your return up to six years after filing.
- Mortgage/Home Records – Keep all records related to your home for the entire time you own it, and for six years after you have sold it in case there are any tax-related disputes associated with the sale.
Be sure to keep all records related to significant home improvements. You will need them to verify the improved cost basis of your home, in order to lower any capital gains tax you incur if you sell.
- Brokerage Records – Keep them indefinitely to verify the cost basis of any securities that you sell. If you prefer, treat them as tax records and discard them seven years after you sell the security.
- Bank Statements – In general, keep regular statements for at least a year.
- Bills/Cancelled Checks – For most bills and cancelled checks, treat them like bank statements as proof of receipt and payment. Keep any documents that are related to larger purchases for as long as you retain the asset – for example, appliances, cars, and jewelry. Prepare a file related to the asset. You may need it to help establish value in case of theft or loss.
- Asset-Related Documents – Things like warranties, invoices, appraisals for items like jewelry and collectibles, and other documents related to larger assets should be kept in a separate file as long as you still have the asset. Don't forget to include the receipts.
- Credit Card Receipts and Statements – Simple receipts can be shredded after the statement is received and the balance is verified, but keeping them for one year is reasonable just in case there are disputes or errors.
For larger purchases or tax-related receipts, seven years is preferred for the same reason as tax records – the IRS no longer considers bank and credit card statements as sufficient documentation. Receipts related to larger assets should be kept longer if the asset lasts longer than seven years.
- Retirement Plan Records – Keep them indefinitely to verify tax status at the time of withdrawal. Contribution records and annual summaries should be kept as long as the plan is in place. If the plan is cashed out or rolled over into another plan, treat them as potential tax documents and hang onto them for seven years.
- Pay Stubs – Generally, one year is all you need, to verify that your W-2 is correct. W-2's will be kept with your tax records. Other pay stubs or receipts for freelance work on a 1099 should be treated like any tax record/receipt.
- Employment Documents – Items such as receipts for bonus checks and other compensation-related documents should be treated similarly to pay stubs and tax documents, depending on in which category they belong.
Non-financial documents like copies of performance reviews, commendations etc. should be kept as long as you have your job in case there are performance-related questions in case of severance. Keep severance documents until you are settled into a new job.
- Health/Insurance Related Documents – Keep these indefinitely, especially anything related to medical procedures and insurance claims.
Of course, once the time comes to discard the documents, ensure they are properly shredded to prevent identity theft. You would be surprised how easy it is for thieves to find personal information in trash or recycling bins.
By managing your records with forethought and care, you won't have to worry about either IRS auditors or cable TV show producers knocking at your door.