How Long Should You Keep Old Financial Records?Submitted by Castlebar Asset Management on April 3rd, 2018
There’s nothing like tax season to get you thinking about what kind of financial documents are important to keep on hand -- but knowing what to do with your old financial records is important no matter what time of year it is.
It can be a pain (and create a lot of clutter) to hang on to every last file and receipt from your financial life. If you know what’s important to keep and what’s okay to toss, you can keep yourself more organized and enjoy a little more peace of mind knowing you didn’t throw out anything essential.
To help you get started, check out these guidelines on what records need to stay on file with you and what’s alright to take to the shredder.
The Important Documents to Keep on Hand
In general, you should plan to keep the following paperwork in your files. You’ll need this information to file your taxes -- and it might be useful for you to review as part of a financial planning process, too.
What you should keep:
- Bank statements
- Statements from any investment account, including your 401(k) plan, IRA, or taxable brokerage accounts (specifically, the annual statements from each of these accounts)
- Statements and forms from your HSA if you have one
- Any tax forms sent to you by financial institutions
What if you own a business?
If you own a business or earn self-employment income (or receive 1099-MISC forms), you’ll need to keep a few more financial records, including receipts and credit card statements.
Think about it this way: you need to keep any document that proves or backs up a claim you might make on your tax return. When in doubt, keep the record until you file. Your CPA should then be able to let you know whether you need to save it or not.
Depending on your financial situation, you may have other forms and documents that are important to hang on to. If you have a life insurance policy, for example, hang on to that for the life of the policy!
And again, ask your financial planner or CPA (or both!) if you’re not sure what you should do with a financial document. They’ll be able to verify whether you need to keep old financial records or if you can toss them.
As a general rule, you want to hang on to paperwork like this for at least 3 years. If the thought of all those documents stacking up and gathering dust in your office drives you crazy, consider going digital.
Request paperless statements from your banks, brokerages, and custodians when possible and simply save your documents to a cloud-based server so you can access your files anytime, from any device.
What About Tax Returns?
In addition to the financial records from the previous year you need in order to file your latest tax return, you need to keep your tax returns themselves.
While 3 years is a good rule of thumb when determining how long you need to keep statements, receipts, and other files, you need to keep your tax returns for 7 years -- and, if you want to be safe, it probably wouldn't be a bad idea to keep all your returns forever.
It might feel like overkill, but the reason is that there’s no statute of limitations on tax fraud. Not that you would commit fraud, of course -- but it means the IRS can investigate you and your returns at any time should they choose to do so.
If you have your returns on file, it should make it easier to show that you followed the rules and filed appropriately.
It’s also important to note that even if the IRS doesn’t need some of your paperwork, another party might. Insurance companies, lenders, and others might need to see some of your financial documents as part of their process of working with you.
How to Keep Your Old Financial Records Safe and Secure
When you determine that it’s time to let some old paperwork go, don’t just toss your files in the trash. They contain sensitive information that provides more than enough data to allow a criminal to steal your identity.
Properly dispose of all old files by shredding them. Or, again, forego paper documents altogether and request to go paperless whenever you can.
Most of our clients already ditched paper, but admittedly, going digital poses a few security challenges too. In this case, you need to make sure where you store your digital files is safe and secure.
You can store your original files on a local device (like your main computer at home). Then, back them up by saving them to cloud storage as well. This will help make sure you can always access your documents should anything happen to your original computer.
Both your main device and any cloud storage you use should be password protected -- and you want to make sure that password is strong. (So, no, “password1” doesn’t work!) You can also use a service like LastPass to set up 2-factor authentication on your accounts and to generate extremely strong passwords for you.
If you need to send or share files, make sure to do so over a secure portal. If you work with a CFP or CPA, they should be able to offer you a safe way to transfer information when it’s time to work on your taxes or financial plan.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.