Which Financial Records Should You Keep—or Shred?

Which Financial Records Should You Keep—or Shred?

June 05, 2023

If you’re like many people, you’ve probably got boxes and file cabinets full of financial records. Tax forms. Bank, investment and credit card statements. Old insurance policies. Cashed checks. And hundreds, maybe thousands, of receipts.

While you should keep crucial documents, you can probably get rid of many that are simply taking up space.

Shred, not trash

Throwing away intact documents with account numbers, Social Security numbers or other information in the trash is an open invitation for identity thieves. Always shred them first. If you take them to a professional shredder, choose a company that allows you to watch your documents being loaded into the shredder. 

The documents you should keep

Let’s start with the ones you should hold on to indefinitely. These include: 

  • Property deeds
  • Trust documents
  • Current insurance policies
  • Automobile titles (for vehicles you still own)
  • Stock and bond certificates (for securities you still own)
  • Wills and estate plans
  • Personal property inventory
  • Marriage and birth certificates
  • Military discharge papers
  • Passports
  • Tax dispute records
  • Medical history information
  • Pension/retirement plan documents
  • Social Security information
  • Account statements from retirement plans still with former employers
  • Home improvement records and receipts (if you still own your house)

In fact, you may want to store critical papers somewhere other than in a file cabinet. A fire-proof safe or a safety deposit box will provide better protection for documents that are very hard to replace.

The ones you can potentially shred

Different records need to be saved for different periods of time. Divide your records into categories, such as short-term, medium-term, and long-term. There are no concrete rules about how long records must be saved, so you will often have to use your own judgment. The following guidelines may help.

Short term (months to 3 years) 
  • Receipts for everyday purchases
  • Household bills, except those that support tax deductions
  • Expired insurance policies
  • Expired product warranties
  • Credit card statements
 Medium-term (4-6 years) 
  • Tax returns and supporting information
  • Income and expense records (including lottery tickets and winnings)
  • Bank and credit union statements
  • Canceled checks and check registers (checks for major purchases may be kept longer)
  • Paid-off loan documents
  • Personal property sales receipts
  • Automobile titles (for vehicles you no longer own)
  • Stock and bond certificates (for securities you no longer own) 
Long term (7-10 years) 
  • Home ownership/sale documents: 7 years after sale or indefinitely
  • Home improvement records: 7 years after sale

Is 4-6 years really enough for tax records?

The IRS typically has three years after a return is filed to audit a return, or two years after you've paid the tax, whichever is later. However, if income was underreported by at least 25 percent, the IRS can look back six years after the return is filed, and there is no time limit for fraudulent tax returns.

If you run your own business or have side-gig income, you may want to hold on to your records for longer than six years, especially if you deduct business expenses. If you get audited, you’ll have to provide documentation substantiating the information in the return being audited.

What about investment-related documents?

Do you really need to hold on to trade confirmations and investment statements forever? That really depends.

The rule of thumb is to keep these records for 4-6 years, in case you’re ever audited and you need to document investment-related activities recorded in your tax returns

However, most brokerage and mutual fund companies and investment advisory firms maintain decades worth of digital records of investors’ statements and can generally provide copies upon request if they’re not available online. Before you get rid of any of your paper records, however, you may want to contact your brokerage company or fund company or financial advisor to see how far back their records go.

This is particularly important if you want to use any method other than “first in, first out” to calculate the cost basis for mutual fund shares you’ve sold. In that case, you may need to keep records of every purchase of shares (including shares purchased through reinvestment of dividends and capital gains) to use other cost-basis calculation methods.

For IRAs, you’ll want to hold on to Form 5498 documents you've received over the years that track both tax-deductible and non-tax deductible contributions you made during a given year. These documents can help you figure out how much you may or may not have to pay in taxes when you make qualified withdrawals from your IRAs.

If you do have questions about any of your financial records, it’s always best to contact your tax professional, attorney or financial advisor before you get rid of them. 

 

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Dan Flanagan is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or dflanagan@canbyfinancial.com

 

Prepared by Broadridge Investor Communication Solutions, Inc. and Canby Financial Advisors. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. 

Copyright 2023 Broadridge Investor Communications Solutions, Inc. and Canby Financial Advisors