The Paris family has fallen into the habit over the years of keeping entirely too many financial records. My wife, who will readily admit this, simply keeps everything. We have boxes of financial receipts in our garage that go back more than twenty years. Well, that is going to all end this week. I ordered a nice sized shredder and we are going to dispose of dozens of boxes of old receipts, tax records, canceled insurance policies, and more.
This week's article is the result of my own research trying to find an answer to the question, "What financial records do I need to keep, and for how long?" While you might think this is a straightforward question, I was surprised to find a wide variety of answers. What I will be sharing is what I would consider to be the most mainstream advice on this question.
Before I get to the list, there is one option I want to share that is sort of a 'split the baby' way to deal with an item that you should dispose of, but still have that nagging feeling that maybe you could need that document down the road. The simple answer to this is to scan the document and save it on your computer or a thumb drive. In fact, some people scan in all of their financial documents and don't keep any physical paper files. I am not sure that I am ready to make that move just yet. For me, there is still the security of a physical piece of paper that I don't have with a computer file that has some chance of being accidentally deleted.
The process of deciding what to keep begins with the basic question of what you are trying to accomplish by holding on to all of this stuff. I think there are two most likely reasons. First, if you are audited by the IRS you want to be sure that you can back up all of your tax deductions. Secondly, you should have proof of your payments for ongoing monthly obligations (just in case they come back later and say you did not pay a bill).
How Long To Keep Your Financial Records
1. Tax Returns And Supporting Documentation
On tax records, many people would say just three years as that is the longest timeframe the IRS can generally go back and audit you. Three years would not be sufficient, however, as the IRS can go back much longer than this if you are suspected of subtantially under reporting your income or other tax fraud. This is a tough one, but I think five to seven years is a good guideline here.
2. Routine Bills
The answer here will have a lot to do with how you pay your ongoing monthly obligations. If you use a checking account or online bill pay, you probably don't need to retain your bills or monthly statements after they are paid. Of course, if you are claiming a tax deduction for a particular item you would need to retain it as outlined in #1 above. Some would suggest holding on to statement for paid bills in a file for a few months, or even as long as a year (and I have no issue with this recommendation). I don't see any reason, however, for warehousing these statements for years and years. If you pay your bills in cash and have concerns about being able to prove you made a payment down the road, you would have a legitimate reason to keep your statements for maybe two to three years for this purpose (or at least your payment receipts).
3. Paycheck Stubs
The thinking here is that once the year closes out and you receive your final paycheck stub for the year, and the associated W-2, you likely have no reason to keep them.
4. Insurance Documents
Generally, you only need to retain insurance policies that are still in force or have an underlying investment or cash value. Again, the Paris family has failed big time here. I have one drawer completely filled with old insurance policies. Not sure why I have kept them, but they are headed for the shredder. In fact, while discussing this with my wife recently, we both agreed that these lapsed polices would only create confusion for our children if they ever needed to make sense of our estate in the event that we both died simultaneously.
5. Investment Statements
Brokerage, retirement accounts, and other investment type statements should be kept for the long run. Since the issue of taxes is inextricable here, the same timeline as in #1 should be followed.
6. Deeds, Mortgages, & Vehicle Titles
Of course, the deed(s) to any real estate presently owned should be kept in a safe place. I would also suggest holding on to all documents related to a real estate closing for at least ten years. You would be surprised how often the issue of proof of the sale of a past home can come up when applying for a mortgage or attempting to clarify an issue on a credit report.
Vehicle titles on your current vehicles should be maintained in a safe location. The bill of sale and proof of a transfer of sale of a vehicle should be maintained for probably at least five years as well.
Of course, over the past several years there have been quite a lot of mortgage companies that have gone under. Many banks have merged, and there has been a lot of lawsuits related to the mishandling of foreclosure litigation. When you pay off your mortgage, you will receive a final statement confirming that your loan has been paid off. Depending on your state, you may also receive an official document showing that the lien against your home has been released. In some states you would also receive your deed (in other states known as 'lien theory' states, the deed is never held by the bank and is given to the buyer at closing). I would keep all documents from real estate closings forever (including from refinancing a mortgage).
7. Student Loan Statements
I am hearing more and more stories of people having disputes regarding the balance owed on student loans after their loan is transferred to a new lender. Just like in #6 above, proof of a paid off student loan should be kept forever (final statement or letter acknowledging pay off). I would also suggest that you keep a year or two of your monthly statements as well. Proof of your monthly payments via canceled checks or your bank's online bill payment arrangement are critical and should be kept for at least three to five years.
An Alternative To Expensive Shredding Services
8. Bank Statements & Cancelled Checks
Since we are relying on our bank statements as evidence in many of the scenarios already discussed above, they should be kept for probably five years (maybe slightly longer). If you don't get physical bank statements mailed to your home, you should take it upon yourself to print them out monthly. Canceled checks should be kept for no longer than a couple of years, unless you need them to back up tax deductions and then follow advice in #1 above. Canceled checks should absolutely be shredded before being disposed of.
9. Keep This Stuff Forever
Social Security cards, birth and death certificates, marriage licenses, military discharge records, divorce decress, and will and trusts (just the latest version of these), bankruptcy documents and discharge papers, should be kept forever. It is also a smart move to keep these kinds of documents in a fireproof safe in your home.
10. Stuff To Throw Away Immediately
ATM receipts, restaurant receipts (unless tax deductible), grocery store receipts, junk mail and credit card offers, miscellaneous correspondence from your bank or financial institution dealing with general policy changes or disclosures, bank deposit and withdrawal slips (once you have checked them against your monthly statement), and credit card receipts (again, once they show up on your monthly statement).
This list does not cover absolutely everything and your own unique situation should be considered. For example, I have a legal file in my office that I have found I needed to access more than ten years after a legal issue was resolved. You can't take a one size fits all approach to any of this, but for records that need to be maintained for subtantially longer periods of time, a scanner can be a great way to do so in an efficient manner.
Final Thoughts On Shredding
Shredding is very important and not just for those once a year cleanings. I have not been one to worry very much about shredding documents over the years, but I am convinced that this is an important discipline to follow. Your garbage dumpster is a goldmine for an identity thief. There are very affordable shredders you can pick up online, and there are even services that will come to your home and take away large amounts of documents to be shredded. I understand that office supply stores like Office Depot and Staples have programs that allow individuals to drop off boxes of documents to be shredded as well (for a fee). Many communities (as seen in the video above) offer low cost document disposal through the local solid waste agency (AKA garbage dump) for that county.
Please use the comments section below to share your own thoughts on disposing of financial records and what method you use to decide how long to keep things.
Helping you make the most of God’s money!