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How Long Should I Keep Financial Documents?
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We recently purchased a sheet-fed scanner, the Fujitsu ScanSnap S300, to help organize our financial records and this purchase is easily one of the top ten I’ve made in my adult life. We went from having a few banker’s boxes of documents down to just a few in about a week. Using a sheet-fed scanner, versus a flat-bed scanner like a copier, can save you a ridiculous amount of time and the ScanSnap will save your document into a PDF. It’s a big pricey but definitely worth it if you’re looking to save things electronically.
One of the benefits of storing documents electronically is that it makes the “how long should I keep financial documents?” question a bit obsolete. Data storage is cheap so you can save documents forever, but I think it’s still important to know how long to keep documents because it gives you a better understanding of finances. Knowing why you should keep tax records for seven years gives you a better understanding of the tax process.
So how long should you keep financial documents? It depends.
The following documents are separated by the time you need ot keep them, excluding obvious “keep forever” documents like life insurance policies (shred when they expire) and estate planning (I suppose someone can shred these when you expire!).
Keep for a Year or Less
- Bank Statements – Review when you receive them, for unauthorized purchases, and keep the most recent one.
- Retirement/401k Plan Statements – Keep the most recent annual summary and most recent quarterly summary. Make sure they match what’s in your account and dispose of old statements.
- Monthly Bills – Review for accuracy but there’s no need to keep them (you might want to keep them for other reasons, like comparing year over year usage if your utility doesn’t provide that information).
- Credit Card Bills – Review your bill for any billing errors, otherwise shred them (or opt for electronic delivery and save them to a directory forever). Credit card companies have all of your statements online anyway.
- Paycheck Stub – One year. Keep them and compare them against your W-2. If it doesn’t match, go to your employer and request a change to your W-2. Otherwise, you can shred the paystubs (your W-2 is good enough).
- Insurance Policies – Keep the most recent one, the older policies on longer apply so you won’t need them.
Keep for 7 Years
You’ll want to keep taxes for seven years. You have three years to file an amended return if you think you’re due a larger refund and the IRS has three years to audit you if they think you made a mistake. The IRS has six years to audit you if they think you underreported income and there is no time limit if they think you failed a fraudulent return.
If you’ve lost old tax returns and would feel better if you had a copy, you can request a copy of past tax returns from the IRS. You can get a tax return transcript for free in about two weeks by calling 1-800-829-1040 or order it by mail using Form 4506T. The transcript contains almost everything from your Form 1040/1040A/1040EZ.
Keep Forever or Indefinitely
- IRA Contributions – Indefinitely. If you made a nondeductible contribution to a Traditional IRA, keep documentation forever because it’s your proof that you made a contribution and already paid taxes on it. You don’t want to pay taxes twice on it and this proves it.
- Brokerage Statements – Keep statements that record purchases until you sell the security, to document any gains or losses.
- Loan Documents – Keep these for the life of the loan and destroy once you’ve paid it off and have title in possession.
- Home Records – Keep all of those bills for improvements until you sell (and then for 7 years after, since they become tax documents) because improvements increase the cost basis of your home. You’ll also want to keep all the other expenses related to a sale (agent fees, lawyer, etc.) to increase your cost basis too.
- Receipts – Keep anything documenting a major purchase or improvements for insurance purposes (including 90-day purchase protection from credit cards), otherwise discard.
- Savings Bonds – Do yourself a favor and convert any paper bonds you have into electronic bonds at TreasuryDirect.gov. Otherwise, keep these for the life of the bond.
Always Opt for Electronic Statements
If given a choice, always opt for electronic or paperless statements. This helps the environment (no mailing, no paper) and it saves you a lot of time. You don’t need to scan a statement if it already comes in PDF form, so save the Earth, save yourself some time, and opt for electronic statements. You can keep these statements around forever and you never know when you might need that information.
If you do opt for electronic statements, download them. If you have a copy, you never need to rely on the data storage practices (or lack thereof) of the bank, credit card, lender, broker, whatever. If you close your account, they won’t keep your records. If a bank fails, they will have records but you won’t have access to them (see this harrowing tale from Fatwallet), making everything just a little bit harder. So if you do opt for electronic statements, remember to download them.
Did I miss an important document? I’m not yet 30 so there may be documents I’m simply not aware of!
(Photo: mucio)
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Electronic version are so much easier to maintain than paper copies. I hate having to sort through paper documents and organize them the way I want, when all I need to do on a computer is make a folder and move the files into that folder.
The biggest concern would probably have to be backup of electronic documents. Do you go with a possibly unsafe backup service through an online company or do get your own NAS with raid enable to make sure it is safe? It’s a tough call and can be difficult to do the later if you are not tech savvy.
NAS with RAID is a great idea but what do you do when you home burns down? Online is the only way to go. You can encrypt the files yourself if you are concerned.
One idea is to do a financial clean up ever so often and keep an electronic copy in a safety deposit box at a bank.
Great point, but I still have concerns over the privacy of documents in the hands of another. I just don’t trust a company being able to access so much information about me. A solution to a fire at your home is to get a fire-safe box to hold the NAS.
The bank will not have access to your safety box unless they hire a locksmith to come and drill the lock out. These boxes require two keys, one of which you hold and keep as the customer.
I’ve made it a practice to keep only the very last paycheck stub from each of my employers (or the last one from each year). These let me see how much I paid in medical insurance premiums and how much was deposited into my retirement accounts for the year.
As far as electronic backup — I’m using Mozy for that.
I agree wholeheartedly with the recommendation about using electronic documents. Also agree that Mozy is a great backup solution. I also recommend encrypting your electronic documents in case your computer is ever stolen.
In addition to keeping last paychek, I make download a PDF statements for 401(k) so I can compare them year over year.
It is so much easier to pull up a file on the pc then to pull it out of a filing cabinet.
I’m trying to figure out how to deal with this to get rid of some of our extra junk. Instead of an online backup, I may just put everything on a flash in store it in a fireproof safe, and possibly have a second copy stored elsewhere.
We recently got a safe deposit box and put a hard drive in there with some important files, among other things. I wanted to store a copy off site, but didn’t really want to give to someone else to store at their house.
My backup DVD is in a locked drawer at work.
I keep a backup hard drive in my car. It’s usually off site and we would take it with us in case of fire.
Encrypt if you’re concerned.
Thanks for this post Jim. This gives me a handy list when I start spring cleaning in my file cabinet!
This is a very valuable post. I’ve always arbitrarily decided what to keep and what to throw out. It’s nice to have some guidance.
As for requesting a past tax return, does anyone know how far back the IRS maintains records. My mother needs to get her employment records for 20+ years ago.
Thanks for the tip on converting paper savings bonds to electronic bonds – I had no idea you could do this. I really do learn a lot here at Bargaineering.
Good to know. Always wondered about many of these.
Yes, excellent organization everyone should practice.
I work overseas often for months at a time in geographically isolated areas so prior to leaving I copy my documents to a USB flash drive and encrypt. It is wonderful to have a virtual filing cabinet of tax records, rental agreements, credit card statements, and my personal budget & networth spreadsheets. Thanks to online software downloads and having my 2008 taxcut tax file with me I even finished my 2009 taxes during my last deployment.
I never thought to keep all of those statements you listed forever. I’m going to make a backup of those tonight.
Thanks for the tip. This has been a big point of disagreement between me and my wife. I’m the pack rat and she wants to get rid of everything ASAP. I can agree with your points. So, we’ll end up using this as a point of reference.
electronic statements are the best, however, some places dont keep them forever and you have to go through a process and in some cases even pay to retrieve them after a certain date. as always read the terms very carefully for anything you sign up for.
Keep W-2s forever. They can be your proof of wages for Social Security should the SSA ever mess up your record.
What better reason to retain copies of W-2s forever than for easy verification of SS earnings!
In addition, if you have ever worked (5 yrs)with a company having a “defined pension plan”, chances are you may be due a pension, though small, once reaching 59.5 yrs+. See ERISA laws. Providing proof of employment is essential as most probably your work records were warehoused many yrs ago and possibly have been trashed or the company may have been bought out with your records…pure history/gone!
It took years to prove, but worked for us!
I’m a fan of just scanning everything and keeping it forever!
Jim, be careful with the insurance policies. You should keep those around for at least as long as the statute of limitations for any claim that may arise under the policy.
Hey Jim,
Have you ever heard of Earth Class Mail (http://earthclassmail.com )?
It’s an interesting service that accepts all your snail mail and digitizes it for you. Really cool.
Yes I have, it’s a pretty cool service though I haven’t used it.
Clark Howard says to keep your tax returns FOREVER.
It is also much easier to search an electronic folder than to find that piece of paper in the cabinet. Just make sure you have both on-site and off-site backups of your data. I lost my hard drive recently. Luckily i made a backup the week before. My financial data was safe but i lost the rest.
Backup, backup, backup.
… and be sure that a person of your choosing knows where to find the off-site one!
I am the handler of financial matters and do 98% of it all online. I feel that it is necessary for me to continue to receive paper statements because my husband does not use the computer. If something happened to me, he would be lost if a statement didn’t come in the mail.
The ScanSnap is godsend lol.
This is all good advice as I am spring cleaning and have taxes from 1997! LOL! Not by choice, just found them. I have never been sure how long to keep documents and my local credit union is holding a free ‘Shred-a-Thon’ and I’m getting it ready to have all these documents shredded. I have at least 5 years of pay stubs,credit card statement, utility statements, etc. in file folders. The external hard drive is also a good idea…thanks everyone!
Contrary to popular belief, opting for electronic online statements do NOT save the earth.
The power consumption of the servers’ array, storage, backup, cooling all consume Huge amount of electricity and release tonnes of carbon into the atmosphere.
Also consider all the toxic metals that go into the making of the servers (this is not a big problem when the servers are being used, but when they are discard, they usually ended up poisoning the atmosphere somewhere)
One thing about the artice. It says that you can get rid of bank account statements after you review it and get a new one. I was audited by the IRS in 2004 and they wanted all of my bank statements from 2001 to 2003. That stretched out the audit for an extra two weeks while I waited for the bank to send me copies. Now a days, you can download them if you use online banking.
electronic filing is nice until
your computer crashes………
Also think about.. odds are you are more likely to be divorced than an IRS audit. Part of the division of marital property includes divulging all financial data. Bank staements, expenses and so forth for several years. BofA charges for each page of bank statements.