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How Long Should I Keep Financial Documents?

We recently purchased a sheet-fed scanner, the Fujitsu ScanSnap S300 [3], 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

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 [4] 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 [5]. The transcript contains almost everything from your Form 1040/1040A/1040EZ.

Keep Forever or Indefinitely

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 [9] 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 [10])