Keeping your finances properly organized requires a lot of paperwork. At tax time, you probably pay even more attention to what you should keep, and what you can toss. You can significantly reduce your paper clutter — and save your sanity — when you understand which papers to preserve, and which you can toss. Use this handy guide to determine how long to keep records.
Papers you can throw after a year or less
Some documents can be discarded rather quickly. Surprisingly quickly in some cases.
- Credit card bills: After you have checked your credit card statements, and paid what you owe, you can shred your credit card bills. One exception is if you need the statement showing a charge that is under warranty (staple the bill to the warranty and keep in a separate warranty file). The second exception is if you are taking a deduction related to something you charged. Consult your tax checklist, and keep the bill as a way to prove that you can use the deduction. Keep the bill with your copy of your current year tax return.
- Bank account statements: Once you reconcile your statements, they can be shredded. However, as with the credit card bills, you need to keep them with tax documents if you are taking a deduction.
- Investment statements: Monthly and quarterly statements can be shredded when you get new statements in. Annual investment statements, though, should be kept until you sell the investments. You should also keep annual statements for tax purposes (such as retirement accounts) on hand, and in folders separated by deductible and non-deductible accounts.
- Pay stubs: Keep your pay stubs for each year. Once you have reconciled them with your W-2, then you can shred them.
- Receipts: Unless you’re using them for back-up information for taxes and warranties, most receipts can be instantly shredded. Enter them into a personal finance program to help you track your spending, and then get rid of the paper.
- Insurance policies: As soon as you get your insurance policy renewal, you can shred your old insurance policy documents.
Documents you can get rid of after a limited time
Some documents are only needed until they have served their purposes.
- Loan documents: Keep these documents someplace secure (fire safe, safe-deposit box) until the loan is paid off. When the loan is paid off, and you have the title or the deed, you can shred the loan documents.
- Vehicle records: Store maintenance and repair records for as long as you have the vehicle. They may be needed for warranty information, or the next owner may want them. You should keep titles, purchase receipts and registration information in a secure place for as long as you own the boat, car, motorcycle, truck in question. After ownership is transferred, you can get rid of these documents.
- Investment purchases: When you purchase an investment, you are sent a confirmation. This can help you establish a cost basis. If you get this information in an annual statement, discard the confirmation after you get the statement. Otherwise, keep the document until you sell the investment. But, then, you will need to move the document into your current year tax file as part of your records.
- Savings bonds: Keep these secure until you cash them in. Treasury Direct has a handy program that will let you exchange paper bonds for electronic bonds.
Records you should keep for seven years
For the most part, only tax records need to be kept for seven years. You should keep copies of your tax returns with their supporting documents (statements, receipts, etc.). I like to put all of my tax documents and supporting papers in a manila envelope labeled with the tax year, and then safely stored. If you are suspected of fraud, you can be audited any time, and the government has six years to collect taxes or start legal proceedings if you do not report more than 25% of your gross income. And, of course, any of your tax returns in the last three years are subject to random audit.
Never get rid of these papers
There are a few papers that you should never get rid of. Obviously, you need to keep birth, marriage, divorce, military discharge, Social Security and death documents in a safe place, and keep them forever. But there are other items that you should hold on to.
- Life insurance policies: Life insurance policy documents related to permanent coverage should be kept until the covered person dies and you get your payout, or until you cash in the policy. Term life policies, of course, need only be kept until the term expires, or the covered person dies.
- Defined benefit plan papers: If you have a defined benefit retirement plan, keep this information safe, and keep it forever. This goes for documents from current and past employers.
- Estate planning: Documents related to estate planning — wills, trusts, powers of attorney, health care proxy, etc. — for as long as they are in effect. Not only should these be kept someplace secure, but you should also have copies for your attorney and for your executor. Physicians should have copies of health care proxy documents.
If you are conscientious about organizing your papers, and if you know when you can get rid of certain documents, you will find your entire financial life much better organized. Creating a system, reducing paper clutter and regularly having secure document shredding done for the records that you do not need also dramatically reduces your chances of identity theft.