| 04 September 2008
Spring is always a good time to get rid of the clutter that has built up in our houses and garages. With tax time behind us, this is a particularly good time to do some spring cleaning of our financial records. However, I find that getting rid of old financial records is difficult because of not knowing what to throw out and what to keep. In fact, of all of the important questions posed to me, one of the most common is when can I throw out these statements? The answer is easy - throw them out when you don’t need them anymore!
Okay, how do you know when you don’t need them anymore? It depends largely on the type of record, but there are no rigid rules and it often comes down to personal preference. Let me break it down into categories and provide some guidelines.
Tax Returns – Tax returns and all supporting records should be kept for seven years. This is because the statute of limitations for audits is generally seven years (if there is suspicion of fraud or unreported income). Four years would normally be sufficient because it covers the typical audit period. However, I don’t think that it’s a bad policy to keep tax returns forever. You certainly don’t need all of the support documentation beyond the potential audit period, but the tax return itself doesn’t take up much room, so why not keep it as a historical record? I’ve got all of my old tax returns. If you’re not as compulsive as me, though, then destroy the tax returns after seven years.
Taxable Investment Statements – Any record that supports the cost basis of an investment should be kept as long as the investment is held. The cost basis is the purchase price plus any additions. Regular mutual funds distribute dividends and capital gains that most fund owners reinvest by buying more shares of the same fund. The dividends and capital gains are reported for tax purposes as income even though you might not receive the cash, and the cost basis of the investment is increased accordingly. This is so you will not pay taxes again on the same income when you sell the fund. Thus, every document that shows a purchase or reinvestment regarding a mutual fund – such as a trade confirmation slip - should be kept until the shares are sold.
It’s much easier with an individual stock or bond because only the original purchase price and eventual sales proceeds are important. Therefore, monthly statements that reflect activity that changes the cost basis of an asset (including stock splits) should be maintained but many statements could be thrown out. I like the idea of at least keeping the year-end statement for each mutual fund or brokerage account.
Retirement Account Statements – From a tax perspective retirement accounts such as IRAs are much easier because we don’t care about activity occurring within the account as they are sheltered from current taxation. Taxes are paid only on distributions (usually in retirement) and are reported on the 1099 tax statements generated by the account custodian. The owner just needs to keep any statement that shows contributions to the account. Monthly statements are generally not needed unless new contributions are made during the month. Again, I like to keep the year-end statement for retirement accounts even though it might not be absolutely necessary.
A common mistake that I’ve seen is failure to maintain documentation regarding non-deductible contributions to IRAs. These should be reported on IRS Form 8606 in order to track the cost basis of the IRA – but often they are not filed. If you don’t have a Form 8606 in your tax files that accurately reflect the after-tax contributions to IRAs, you should make sure to submit one next year.
Purchase Receipts – These might be credit card receipts, cancelled checks or other paper receipts. Purchases that don’t relate to tax return information only should be kept as long as you might need to prove ownership of the item. Thus, receipts for things that are consumed during the reporting period such as gas, restaurant and grocery receipts can be destroyed once your monthly statement is reconciled. Purchases of durable goods, such as a TV, should be kept as long as you own the item in case you need to substantiate ownership for warranty repairs or an insurance claim.
Records related to home improvement are particularly important because they may become part of the house cost basis for tax purposes and also could substantiate the replacement cost for insurance proposes.
Regulatory Stuff – Most investors receive tons of paper from the custodian who is required to provide most of what they send such as proxy statements, prospectuses and annual reports. Read them if you want to, and them pitch them, or throw them out immediately if you don’t feel the need to read them. Better yet, ask the custodian to make them available electronicallhy to cut down on the clutter.
Utility Bills – Statements for water, cable, telephone and other such utilities don’t need to be kept very long. I would hold them only long enough to help in case of disputes, or as needed for budgeting information.
Legal Stuff – Some records much be kept indefinitely for obvious reasons. Birth certificates, marriage certificates, deeds, insurance policies, car titles and contracts are legal documents that should be kept forever unless the period of usefulness clearly is over such as a lapsed insurance policy or a mortgage that has been paid off. These types of documents should be kept in a place secure from fire damage and theft such as a fire proof safe or box.
Letters and statements that relate to the status of pensions and other retiree benefits should also be kept indefinitely. Conversely, pay stubs can be pitched at the end of the year once you receive the final summary pay stub and/or W-2 form.
If you are going to tame the paper tiger, you’re going to need a couple of tools. One is a shredder. We are all aware of the risks of identify fraud these days, so throwing out documents doesn’t mean using the waste basket, unless it is non-personal waste such as marketing materials. Many envelopes come in the mail stuffed with lots of useless and non-personal filler which can be tossed. Most of the records outlined above, though, should be shredded to prevent misuse. Investing in a good shredder would be a worthwhile expenditure.
Scanning documents is another great way to cut down on paper. You might be surprised how easy it is to scan documents. At work, I scan all documents and store them electronically and shred the paper copies. This saves a tremendous amount of file space, but the main benefit is the ability to retrieve information when you need it. I intend to purchase a scanner for personal use and start a similar routine at home.
As you can see, there are many types and uses for documents. To deal with the avalanche of paper means using methods and tools to save or destroy documents in a rational and secure manner. If you haven’t started your spring cleaning, there’s no time like the present.
Share this page
