Now that tax season is behind us, it’s time to clear out some paperwork. Every time tax season rolls around, our mailboxes and email inboxes are filled with W-2s, 1099s, K-1s, 5498s and a slew of other forms with random combinations of letters and numbers that are nearly impossible to keep straight. And these are only the tax documents. We haven’t even mentioned legal documents, monthly brokerage statements, bank statements and loan records.
While this may not sound like a terribly sexy or exciting topic, like spring cleaning, there seems to be a feeling of closure and relief when we can file the past year away and move on to the next. So, how long do you really have to keep this incredible pile of paper? The following tips will help you when trying to decide whether to file or shred your tax and financial records.
Tax records
Keep them for seven years after filing. The biggest reason you want to keep financial records is to provide backup for a tax issue.
The statute of limitations for auditing a properly filed tax return is three years. However, the IRS can extend this period up to seven years under certain circumstances. Therefore, to play it safe, you should keep your tax returns and all supporting tax records (W-2s, 1099s, K-1, proof of payment for any deductions or credits claimed) for seven years.
Investment records
Keep them as long as you own the investment, plus seven years. You can shred your monthly statements at the end of the year once you’ve reconciled them with your year-end statement. Keep year-end investment statements for seven years. These records document cost basis and are helpful for determining capital gains or losses.
Real estate records
Keep them for seven years after the sale of the asset. Real estate records include receipts for home improvement, closing statements, purchase contracts, appraisals, inspection reports, mortgage papers and so forth. Records for any real estate you own, including your primary residence, vacation homes and rental properties, should be kept for seven years after you sell, exchange or dispose of the asset.
Bank statements
Keep them for three years. Year-end bank statements should be saved for three years just in case of an audit. You can shred your monthly statements at the end of the year once you’ve reconciled them with your year-end statement.
Insurance records
Keep them for three years after the policy ends. For life insurance, keep policy documents as long as the policy remains in force or until the term has been fulfilled, plus three years. Monthly statements can be shredded after being reconciled to the year-end statement. For health, property and casualty insurance, keep your paperwork for as long as you have the policy and keep documentation for any claims until they’re resolved and paid in full.
Loan records
Keep them for the length of the loan. Keep all documents related to loans until they’ve been paid off. If you receive monthly and year-end statements, keep the monthly statements until they can be reconciled to the year-end statement. Documents for loans that are tax deductible should be kept for seven years after filing. Keep documentation proving you paid in full indefinitely.
Estate planning documents
Keep them indefinitely. All legal documents should be kept indefinitely. This includes old trust documents that have been amended or restated. Legal documents include wills, trusts, powers of attorney, health care directives, pre- and post-nuptial agreements and so on.
Retirement plan documents
Keep them indefinitely. Retirement plan documents should be kept forever, even if they’re from a former employer. Any paperwork documenting contributions to and withdrawals from retirement accounts should also be kept indefinitely. This includes Form 8606, Form 5498 and Form 1099-R. Rollover or transfer paperwork between custodians should be kept until retirement to make sure no errors occurred. Monthly statements can be shredded after being reconciled to the year-end statement.
How to dispose of financial documents
Make sure to shred all financial documents you plan to throw away. Throwing them in the trash opens you to identity theft. With these tips in mind, may your file cabinet be organized and your Spring bring new growth.
Zach Mangels is an adviser with Private Ocean, one of the oldest wealth management firms in the North Bay. Private Ocean gives clients the intimate experience of a small firm, while harnessing the power, depth and discipline of a much larger one. For more information, please contact Susan Dickson at (415) 526-2904.
