Content of the material
- How Long to Keep Financial Documents: The IRS Rules
- Property Records
- Bank Statements
- How to organize your tax records
- What Financial Documents Should You Keep Forever?
- Bank Records
- How Long to Keep Financial Documents: Staying Organized
- Online vs. Hard Copy Statements
- Permanent Keepers
- How long should you keep plan records?
- How long to keep your current records
- 3 years
- 6 years
- 7+ years
- Where should you save your 401(k) statements?
- Keep It Online
How Long to Keep Financial Documents: The IRS Rules
Since we must retain records to support the information reported in our tax returns, it makes sense to use the IRS’s rules as a starting point. If the IRS ever audits you, you want to have the information the auditor asks for available.
First, the IRS expects you to keep your tax returns and any supporting documentation for three years after you file your returns. However, it is not that simple. If you understate your reportable income by 25% or more, then you need to save your records for six years from the filing date. If you fail to even file a return, the IRS expects you to keep those records forever. If you don’t have records to support your income or deductions, then you are more or less at the IRS’s mercy.
According to this IRS tip sheet, the IRS expects you to keep your records indefinitely if you file a fraudulent return. This seems a bit ironic. The IRS says not to cheat on our taxes, and we agree wholeheartedly with that view. However, if you did cheat, the normal inclination would be to destroy the evidence. Instead, the IRS tells you to hold onto it.
You should also keep in mind the rules for state tax returns. You can find general guidelines on how long to retain state tax records here.
Do you need physical copies of these records, or will digital copies suffice? According to Revenue Procedure 97-22, documentation for tax purposes can be retained entirely in digital (and not physical format). This applies as long as the scanned/photographed copy contains all the relevant information.
The bottom line. Keep your tax returns and the related supporting documentation for seven years. While some people recommend six, I suggest seven. Why? You file your tax return the year after you incur the expense. The extra year covers that time lag.
If you’re a homeowner, you should keep documents related to the purchase of your home, as well as records of substantial improvements you’ve made, such as remodeling projects and additions. Keep these on hand for at least six years after you sell the home, Bankrate.com advised.
In addition, it’s important to keep records of the expenses you may have incurred in buying or selling your home such as legal fees and commissions paid to real estate agents.
Why? Both of these types of expenses are included when calculating your capital gain, the profit from the sale of an asset. If you’ve made improvements to your home, or incurred expenses when trying to sell it, these expenses get added to your original purchase price, thus lowering your capital gain. The lower your capital gain, the less you might have to pay in capital gains tax when you sell your property.
If you’re a renter, you have it easier. It is okay to shred rental agreements after you’ve moved out and the landlord has returned your security deposit, McBride said.
How long to keep: Three years. You’ll need bank statements for up to three years if you are audited by the IRS. If your bank provides online statements, you can switch to receiving your bank documents online and cut down on paper.
How to organize your tax records
As you’re working on your taxes, it’s crucial to remember that you may need to access them again in the event of an audit by the IRS. With that in mind, a shoebox with loads of papers or files scattered throughout your hard drive is not a good move.
Instead, start a filing system that organizes all your records by year and by category, such as bank statements, income forms and receipts. Throughout the year, make sure you’re maintaining that system so that everything makes sense when you file — and if the IRS requests something from the past, you’ll be able to track it down quickly.
If you’re still dealing with a heavy amount of paper, there are plenty of apps to digitize and simplify your life, such as Expensify or CamScanner.
What Financial Documents Should You Keep Forever?
We’ve looked at documents that are okay to throw away after a specific time, but there are plenty of documents you should hold on to indefinitely. Important papers to save forever include:
- Birth certificates
- Social Security cards
- Marriage certificates
- Adoption papers
- Death certificates
- Wills and living wills
- Powers of attorney
- Legal filings
- Military records
- Retirement and pension plans
- Inheritance documents
- Beneficiary forms
For anything you’ve bought or insured, you should save the related documents for at least as long as you own them or until the warranty ends. It won’t hurt to keep them around longer, though, just to be safe. This includes titles, deeds, insurance policies, warranty documentation and more.
Health insurance policies and related documents are important to keep long term, too. So long as your health insurance is active, you should keep these records. If your coverage ended or you’ve moved to another insurance company, go ahead and toss paperwork once you’re sure you won’t need it. The same is true if you receive disability or unemployment benefits. Keep the documentation until you know you no longer need it.
If you have financial records or documents you aren’t sure you’ll need, err on the side of caution. Keep any documents until you are positive you don’t need them.
Here it’s a matter of picking and choosing what you might need in the future. It’s a good idea to go through your checks once a year and to keep those related to your taxes, business expenses, home improvements and mortgage payments. You can shred the others that have no long-term importance.
If you bank online, of course, you can simply print out the statements you might need down the road.
How Long to Keep Financial Documents: Staying Organized
Adopt a filing system and stick with it. Be careful about falling back into bad habits. Don’t wait too long to file your documents. Otherwise, the idea of how long it will take to get caught up may keep you from putting things where they belong.
At the beginning of each calendar year, it can help to establish an accordion file (or, an electronic equivalent for scanned documents). Label a divider – or file folder – to cover each bank or investment account as well as income or expense type. This file can help you match receipts to credit card and bank statements as well as when you prepare your tax return.
At the end of each year, you should purge this file, keeping items you need. There is no need to keep documents longer than necessary. If the document contains personal information, shred what you no longer need.
If you fall behind, do not despair. Schedule time to get things back in order when you have more free time. Tackle the problem a little bit at a time. Focus on keeping your goals achievable, so you can get back to being organized.
Online vs. Hard Copy Statements
Many banks maintain monthly customer statements online for at least five years and they are easily accessible through their online banking apps and sites. These statements usually come in printable formats. Summaries of transaction information are frequently available for download.
You may be able to get hard copy statements from your bank going back a number of years. Some banks charge a search and printing fees for this service, as it cannot be done at the branch level. Older statements are handled in a back office.
For safety, it's best to keep any hard copy bank statements in a fireproof safe in a secure location. Electronic statements should be maintained in a password-protected file.
Use password protection for electronic files. Hard copy statements should be kept in a secure, fireproof location that can be easily accessed.
Some retirement statements need to be kept permanently or until the retirement account associated with the paperwork is closed. After the accuracy of your annual statement is verified against your monthly statements, the monthly or quarterly retirement and 401(k) statements can be discarded while the annual statements need to be filed. Keep all paperwork related to nondeductible contributions to your individual retirement account, or IRA, until you withdraw all of the money from the account in order to prove no income tax payments are needed on the funds. (Reference 1)
How long should you keep plan records?
You should keep retirement plan records until the trust or IRA has paid all benefits and enough time has passed that the plan won’t be audited. Retirement plans are designed to be long-term programs for participants to accumulate and receive benefits at retirement. As a result, plan records may cover many years of transactions. The Internal Revenue Code, Income Tax Regulations and the Employee Retirement Income Security Act of 1974 (ERISA), as amended, require plan sponsors to keep records of these transactions because they may become material in administering pension law.
How long to keep your current records
How long do you need to keep all these documents? That varies based on a few factors. While the timelines below reflect federal guidelines, it’s important to note that your state tax authority might operate with different standards.
“Even if you don’t need to retain some records for federal tax purposes, you might want to save them for other reasons,” says Alison Flores, principal tax research analyst, The Tax Institute at H&R Block. “Your state may have a longer time to audit. For example, California generally has four years to audit a state income tax return. Also, an insurance company or creditor may have different record-keeping requirements.”
If you’re a standard employee who receives a W-2 and your taxes aren’t overwhelmingly complicated, your timing can likely be short.
“In general, you should keep your tax records for at least three years after the date in which you filed, according to the IRS statute of limitations,” says Lisa Greene-Lewis, CPA and tax expert with TurboTax. “Three years is the time you have to claim any tax refund owed to you, and it is the time that the IRS will generally go back if they need more information and substantiation of what you claimed on your taxes.”
Greene-Lewis says that rule also applies to self-employed and freelance workers with one exception: If you claim the sale of some type of equipment for your business, you will need to keep them until the three-year statute is up after the year you sell it.
That three-year rule doesn’t apply to everyone, though.
“There are exceptions to this statute,” Flores says. “If you omit more than 25 percent of your gross income from your return, the IRS has six years to assess an additional tax. And if you file a fraudulent return, the statute never expires.”
Even if you can’t remember what exactly you were doing seven years ago, you may need to offer a picture of what you were spending money on to the IRS. Greene-Lewis says that any records related to retirement accounts should be held for seven years after you withdraw the money.
“If you claim a bad debt deduction or have a loss on a worthless security,” Greene-Lewis adds, “then, you should also hold onto the records for seven years after the date you filed.”
Where should you save your 401(k) statements?
Where you save your old 401(k) statements is just as important as why. You shouldn’t simply shove them in the back of your desk drawer and never look at them again. Ideally, you’ll want to save a few copies of them in case something happens to one.
If you have the means to securely save physical copies of your 401(k) statements, make sure they are kept in a fireproof safe or filing cabinet. Also, you’ll want to make sure in the case your home is ever broken into; thieves can’t easily find your documents. Your 401(k) statements in the wrong hands could lead to someone having access to your retirement funds that shouldn’t.
In addition to physical copies, it’s a smart idea to keep digital copies of your 401(k) statements. Be sure to save a couple of copies of each statement in case a hard drive crashes, or you lose access to your cloud storage. Keeping digital copies of your 401(k) statements is ideal because you don’t have to worry about managing stacks of physical paperwork, and you can organize your financial documents more efficiently.
Keep It Online
Keeping paper copies of important financial documents is a good idea, but so many companies now offer the ability to store your records and documents online, so that you don’t have to worry about finding that loan payment confirmation from 4 years ago. There are even apps that allow you to take pictures of your receipts and store them digitally, so you can throw away those financial documents. If the idea sounds a bit scary, you can always try with one financial area at a time, then see how it goes. Who knows, you might not need a filing cabinet in your closet to hold all that paper after all!
>>Read Next: Control Your Financial Clutter in 4 Simple Steps
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