Throwing Away the Old Financial Records

"How long do I need to keep my financial records?" is a common question. Here are some pointers:

Financial records (such as bills) that do not effect your tax return can be destroyed as they are paid. Unless you are using your phone, electric, and gas bills as tax deductions, there is no compelling reason to keep them. The major exception to this would be records of home improvements, like the new kitchen or garage.

You should keep your tax records for a minimum of 4 years and a maximum of 8 years. This would be copies of your W-2s and 1099s, real estate tax bills, business expenses etc. Anything that effects your tax return should be maintained. Why the difference in holding period? If the IRS can prove that you have substantially understated your income or taxes, they can go back 7 years from the date of the filing of your return. So a return for 2001 can be audited up to sometime in 2009. The vast majority of taxpayers have a W-2, some investment income and a house. The odds of these taxpayers understating their income are remote. So, to be on the safe side, keep your records for 8 years.

You should keep your investment records permanently. However, this does not mean that you need to keep every scrap of paper that comes from your broker, mutual fund or bank. Most mutual funds send out a statement each quarter and then an annual one summarizing all the activity for the year. Once the annual statement arrives, get rid of the quarterly ones. The same goes for brokerage accounts. Nowadays, the mutual fund companies and brokerage firms maintain a record of your investment purchases. BUT these can get lost if you switch brokerage firms and some mutual fund companies don’t have the records if you opened the account a long time ago.

Some other notes:

With all the identity theft that is going on today, it is best to shred rather than throw out any records you decide to get rid of. Definitely do not put financial records that are not shredded in the recycle bin.

Keep electronic copies of your records. This is easy if you have brokerage accounts or mutual funds. You can download PDFs of your statements and store them on your computer. You can do the same thing with your charge card statements. You can also get PDFs of your tax returns, and can scan and store the basic records. Think of all the trees you can save by not getting paper copies of everything.

To guard against a computer crash, be sure to backup your data if you keep electronic copies of your records