Simone and I are what we refer to as “anti-pack rats.” Neither of us can stand clutter and we regularly go through our belongings and get rid of things we don’t need. In fact, our recent spring cleaning frenzy led to us donating a couple of items that we shouldn’t have. One donation was an audio cable that I gave to Goodwill, but I was able to buy it back from them before someone else did!
Deciding to get rid of something you can repurchase is easier than deciding whether or not to hold on to things like bank records, tax forms, and investment account statements. So how do you know what to keep? And how long should you hang on to it? For those of you that would like to reduce your paper clutter around the house, here are some suggestions for how long to keep your financial records.
Convert Paper Records to Electronic Documents (PDFs)
Paper records take up a lot of space. Converting old documents to PDFs with a scanner or downloading PDFs from your bank or brokerage firm will allow you to shred the paper records with greater confidence. And just like all computer files, be sure to keep backup copies. Simone and I have an online backup tool that runs 24/7, keep our records synced across multiple encrypted computers, and backup those computers to offsite encrypted hard drives at regular intervals. That’s probably (read: likely) overkill, but better safe than sorry!
Tax records are where I have the hardest time getting rid of paper copies. In fact, I think Simone and I have our tax returns for the 18 years that we’ve been married as well as a few from the years before we said “I do.” Technically the IRS has three-years from the filing date to audit your return, but this time limit extends to six years if it thinks you underreported your gross income by 25% or more. The statute of limitations if eliminated entirely if you failed to file a return or if the IRS accuses you of completing a fraudulent return. Based on this info – if I ever work up the courage to clean out our tax files – I’d probably keep all returns and supporting documents for the past six or seven years. For the other years I’d probably just keep the returns and shred things like receipts, mileage books, and other supporting documents. If you really want to be sure, consult your tax preparer, as he or she will know your tax history.
Bank and Credit Card Records
It’s a good idea to keep bank and credit card statements that support information on a tax return. Also consider hanging on to statements for any purchases that might be covered under an extended warranty offered through a credit card. You might also consider keeping credit card annual summaries as well as bank statements to help estimate your spending needs in your financial plan.
IRA Contributions and Withdrawals
IRA contributions are reported on Form 5498. It’s probably a good idea to keep records of Roth IRA contributions as well as nondeductible contributions to Traditional IRAs. Contributions to Roth IRAs can be removed before age 59 1/2 without penalties, so you should keep records of the Roth contributions you’ve made over the years in case you ever need to withdraw money from your Roth IRA before 59 1/2. And regarding nondeductible Traditional IRA contributions, you might need the Form 5498s in the future to avoid being double taxed on that money when you make withdrawals or convert that money to a Roth IRA. Non-deductible IRA contributions will be reported on Form 8606 when you file your taxes, so you should keep this tax form permanently (i.e., until you deplete the entire Traditional IRA balance or convert all of it to a Roth IRA). Withdrawals from IRAs and 401(k) accounts are reported on Form 1099-R. Keep all 1099-Rs for as long as needed to support your tax returns.
Retirement Account / IRA Statements
Retirement account statements aren’t needed to support cost basis like they are with taxable accounts. You also don’t need them to show deposits and withdrawals since that type of activity is reported on other forms (e.g., 5498s, 8606s, and 1099Rs). That being said, it never hurts to keep retirement and IRA account statements that show deposits and withdrawals in order to support information on your tax returns.
Taxable (Non-Qualified) Brokerage Account Statements and Trade Confirmations
You should keep account documents that show the cost basis of any investment you still hold in a taxable investment account. Even after you sell the holding you should keep these records for as long as necessary to support your tax documents. You can get rid of trade confirmations as soon as the purchase shows up on an account statement, and you can shred monthly account statements if you have an annual statement that contains the same information. Once again, converting these documents to PDFs will let you keep more of them without taking up valuable space.
Annuity and Insurance Policies
Keep original annuity contracts and insurance policies for as long as you have the contract and/or policy. This is especially true for annuity contracts and policies for non-term life insurance (e.g., whole life, variable universal life, etc.) since the contract and/or policy details will help determine if you should keep the annuity or life insurance policy (vs. surrendering it or transferring to a lower-cost and/or better alternative).
Real Estate Records
Hold on to records for any real estate you currently own and keep records for any real estate that you’ve sold as long as needed for tax purposes. Keep any records that document the purchase price, buying and selling expenses, as well as the cost of any improvements you’ve made to the property since this type of information will be needed to determine your cost basis when selling the property.