How Long to Keep Important Documents (and What You Can Shred)

How Long to Keep Important Documents (and What You Can Shred)

Just a decade or two ago, people were predicting that the society of the 21st century would be paperless. Everything from work documents to utility bills would exist strictly in digital form, and the clutter of paper documents that fills many homes would be a thing of the past.

Someday, that may happen. But today isn’t that day.

Most of us still see paper documents entering our homes every few days, if not every day: store receipts, junk mail, bills, bank statements, tax documents, pay stubs. It’s tempting to just sweep it all into the bin, but we wonder: Are we going to need these documents again? If so, how long should we keep them, and how should we store them so we can easily find them when we need them?

The answer to those questions depends on the specific type of document. Here’s the lowdown on which of those annoying papers you need to keep, how long you need to keep them, and the best way to keep them safe and organized.

How Long to Keep Important Records

If you had to keep every piece of paper that comes into your possession forever, from a grocery receipt to a parking ticket, it would soon take up so much room in your house that you and all your belongings would be squeezed out onto the street.

Fortunately, that isn’t necessary. There are some documents you should hold onto indefinitely, but there are others you can safely discard in as little as a month. Here’s a guide to storage times for different types of documents.

Tax Documents

When you finish filing your tax return, you can’t just dump all the documents you used to complete it. The Internal Revenue Service (IRS) could audit your tax return for up to three years after you file it — or up to six years if it suspects a significant error — and if it does, you’ll need those documents. The IRS recommends keeping both your tax return and all material related to it “until the period of limitations for that tax return runs out,” and it provides a detailed list of situations in which that period could be anywhere from three years to forever.

However, according to Greg McBride, chief financial analyst at Bankrate, there’s no need to bother with all those details. Instead, McBride tells Consumer Reports that you should just keep all tax-related records for at least seven years. That includes your tax return itself, supporting forms such as your W-2 and 1099, and any documents related to items you claimed as deductions, such as:

Hold on to any bank records, receipts, and canceled checks that show you had these expenses so that you can prove it in case of an audit.

Some experts argue it’s worth holding on to your tax returns themselves forever. Eric Reed of TheStreet points out that the IRS can audit you at any time in suspected cases of fraud or for a return it claims was never filed. And Eva Rosenberg of MarketWatch, also known as “Tax Mama,” says your old returns and W-2 forms could be the only way to prove your income for a given year if there’s an error on your Social Security earnings statement.

Credit Card Records

When you make purchases with your credit card, don’t just toss the receipts in the trash when you get home. Keep them until you get that month’s credit card bill and then check them against the statement to make sure it includes everything you purchased — and nothing you didn’t. That way, you’ll be able to dispute any charges that aren’t legitimate or request a chargeback for any items you ordered that you never received.

Once you’ve checked your monthly statement, you can dispose of the receipts in most cases. However, if they’re for items you plan to claim on your taxes, you should file them in your tax information folder instead.

It’s also worth holding on to receipts for large purchases, such as furniture, appliances, electronics, or home improvements. You can use them as proof of purchase if you need to file a warranty claim, or to prove the cost of an item if you need to file a claim for loss or damage on your home insurance. If you plan to keep a receipt for either of these reasons, make a copy of it on plain paper and file that since thermal-paper receipts tend to fade over time.

As for the credit card statement itself, you can probably toss it after paying it. If you need a copy of it later on – for example, to verify a purchase – you can get one from the credit card company. However, if the statement includes purchases you’ll be deducting on your taxes, keep it on file with your tax documents.

Other Bills

After paying your utility, cable, and cell phone bills for the month, hold on to them until you can verify that the payment has gone through. That could mean waiting until you get the next month’s statement or just checking your account online after a couple of days.

Once your payment is verified, you can dispose of the bills in most cases. However, if you’re self-employed, hold on to those bills until you file next year’s taxes. There’s a chance you could deduct all or part of the cost as a business expense.

Pay Stubs

If your workplace doesn’t deposit your paycheck directly into your bank account, then each check comes with a paycheck stub that lists information such as your gross pay, taxes, and other pre-tax deductions. Experts say you should keep these forms until it’s time to file next year’s taxes so you can check them against the annual W-2 form you receive from your employer. If the amounts on the W-2 and your pay stubs don’t add up, you can request an amended tax form, using the stubs as evidence.

You can also use your pay stubs to make sure the income listed on your Social Security earnings record for the year is accurate. The Social Security Administration (SSA) no longer sends out these statements by mail, so you’ll need to register for an account with them to view your statement.

It’s a good idea to check your statement every year for errors. If the SSA understates your income for one or more years, it will affect the number of benefits you’re entitled to when you retire. If you find a mistake, contact the SSA to correct it as soon as possible.

Insurance Records

If you’re like most Americans, you have at least a couple of different insurance policies. For instance, you could have health, car, life, and homeowners or renters insurance. Each of these different policies comes with paperwork from the insurer showing what your policy covers and what your deductibles are.

As long as you have the policy, you should hold onto the current paperwork for it. It will allow you to check your coverage before filing a claim or prove you have coverage in case of a dispute with the insurance company. When you renew or change your policy, you’ll receive a new set of papers for it, at which point you can discard the previous ones.

Bank Records

Each time you use an ATM or make a deposit or withdrawal at a bank teller window, you get a receipt. Keep these until you get your monthly statement from the bank so you can make sure all your transactions were correctly recorded. After that, you can toss them.

If you bank online, then there’s no need to hold onto your monthly bank statements after checking them. You can always go to the bank’s website or app to access a copy of your statement for any given month. If you don’t bank online, then it’s a good idea to keep your monthly statements for a year – or up to seven years if you need them for tax purposes. If you receive an annual statement that contains tax information, you can keep that instead and discard the monthly statements.

If you still use paper checks, hold onto the canceled checks – or the reproductions of them that come with your statement – for one year. That way, you can produce a check when you need it as proof of payment. Each month, go through all your checks that have passed the one-year limit and file the ones that are related to your taxes, business expenses, home improvements, or mortgage payments. All the others can be shredded.

Investment Records

If you invest in stocks, bonds, or mutual funds through a brokerage firm, it will send you a quarterly statement every three months to show how your investments are doing. Keep these statements until the end of the year when the company sends out its annual statement. Check the quarterly statements to make sure they match the annual summary, then discard them. Hold on to the annual summaries for as long as you own the securities, plus another seven years, in case you need them for tax purposes.

If you buy and sell individual stocks, bonds, or funds online, you should receive a purchase confirmation whenever you buy a security. Keep that confirmation until you sell the security so you can refer to it when you report the capital gains from the sale on your taxes. After that, you should probably keep it on file with your other tax documents in case you need it for an audit.

Retirement Documents

Retirement plans, such as 401(k) and 403(b) plans, also send out quarterly statements. Experts say you should treat these the same as quarterly statements for other investments: Keep them to check against your annual statement, then discard them.

Experts agree that you should keep the annual statements at least until you retire, and some recommend keeping them as long as you’re continuing to draw money from the plan. That’s especially important for Roth IRA and Roth 401(k) plans so that you can prove you’ve already paid taxes on your contributions. If your workplace is one of the few that still offers a defined-benefit pension plan, experts recommend keeping all documents related to that plan permanently, even after you retire.

Loan Documents

If you have debts such as a mortgage, car loan, or student loans, hold on to all the paperwork relating to those loans until they’re paid off. That includes the loan agreement and records of all your payments. Keeping these records allows you to prove exactly what you owe and how much you’ve already paid.

Once a loan is paid off, you should get another document showing that the loan has been paid in full. You should keep this document for at least seven years for your tax records. However, if you have the space, it’s a good idea to hold onto it forever so that you can prove the loan is paid off. For mortgage loans, you should definitely keep this record forever.

Property Records

If you’re a homeowner, you need to keep all records related to the purchase of your home and any major home improvements you’ve made. That includes records of any expenses related to the home purchase, such as legal fees and real estate commissions. You’ll need these documents to establish your cost basis – that is, the total amount of money you’ve put into the home – when you sell it. That information will affect the amount you pay in capital gains tax on the sale.

Likewise, if you own a vacation home or invest in real estate rental properties, you should keep these same documents for all the properties you own in addition to your main home. For tax purposes, hold onto these documents until seven years after you’ve sold the property.

Another useful document to keep is your quarterly property tax bill. Keep the bills, as well as the receipts or canceled checks to prove you made the payments, until you file the next year’s taxes. If you’re involved in any dispute over your property tax payment, keep the bill until the dispute is settled.

Another document you need to keep – and make sure to keep in a safe place – is the title to your home. This document is your legal proof that you own the property. Keep the title to your home until you sell it. Do the same for the title to your car if you have one.

If you’re a renter, you don’t have any purchase records to worry about, but you most likely have a rental agreement that you signed when you move in. Keep this document as long as you live in the home so that you can refer to it if you have any disputes with your landlord. Once you’ve moved out, hold onto the rental agreement until your landlord returns your security deposit. After that, you can shred it.

Personal Records

Some of the most important papers you own are the ones that document the important events in your life. Depending on how your life story has gone, these could include any of the following:

  • Birth certificates (your own and your children’s)
  • Adoption papers
  • Social Security card
  • Marriage license
  • Divorce decree
  • Naturalization certificate
  • Military discharge papers
  • Wills, trusts, powers of attorney, and other estate planning documents
  • Death certificates (for a spouse and other close relatives)

You’ll need to use these documents at various times throughout your life. For instance, you can use a birth certificate or Social Security card as ID when applying for a driver’s license or passport; you’ll need to produce your divorce decree if you want to get married again, and your heirs will need access to your will after your death. Keep these documents forever, and keep them in a secure place, such as a safe deposit box.

Speaking of safe deposit boxes, Consumer Reports says that if you have one, it’s a good idea to keep a list of its contents. You can refer to it if you suspect anything is missing. Keep this list as long as you have the box.

How to Store Your Records

Red Document Binders

Once you’ve sorted through all your records and figured out what to keep, you need to decide where to keep it. There are two main ways to store your documents: on paper or in digital form. Whichever way you choose, you’ll need a system for keeping your records organized so you can easily find them when you need to. And while you’re working on getting your files in order, you can take a few precautions to protect your sensitive documents from damage and theft.

Storing Paper Documents

Paper documents fall into several different categories. Credit card receipts, ATM receipts, and bank deposit slips all need to be stored for less than a month. You can stash these in an envelope or pin them on a receipt stand. At the end of the month, you can check them all against your credit card or bank statement and then dispose of them.

Next, some documents – such as quarterly investment reports and insurance forms – need to be kept for a year or less. A handy way to store these is in a filing cabinet or hanging file crate with a separate folder for each category: home, car, financial, and so on. If you’re short on space and only have a few documents to store, an accordion file organizer with multiple built-in pockets offers a compact alternative.

Finally, there are documents you need to store over the long term, such as tax returns and property records. With these, you have to decide what’s more important to you: protecting your files or keeping them accessible.

Storing your long-term documents in a file cabinet, along with your short-term ones, makes it easy to find them when you need them. And if you choose a file cabinet with a lock, it keeps your sensitive personal information away from prying eyes. However, it doesn’t protect these documents from being damaged in the event of a fire or flood. By contrast, storing your documents in a fireproof safe protects them from damage and theft, but it makes them harder to access.

Small business expert Barbara Weltman, speaking with Consumer Reports, recommends choosing a fireproof safe for documents that are especially sensitive: bank and investment statements, tax documents, estate-planning documents, and pension information. Because these documents contain personal information, such as your Social Security number, leaving them where others could find them puts you at risk for identity theft.

It’s also a good idea to keep insurance documents in your safe so you’ll be able to recover them after a fire, flood, or burglary. That includes your insurance policies and a copy of your home inventory, which you’ll need to make a claim. Experts also suggest making a list of all your most important accounts and stashing it in your safe for reference.

Storing Electronic Documents

Keeping your financial documents in digital form can be easier than storing physical documents. Electronic files take up less room in your house than filing cabinets full of paper, and they can’t be destroyed by fires or floods. If you already receive most of your bills and statements in digital form, it’s easy to file them away on your hard drive, and if you have paper documents, you can convert them to electronic form by scanning them.

However, electronic files are vulnerable to other threats, such as computer viruses and hacking. Here’s how to protect your digital records from these dangers:

  • Use Password Protection. First, make sure you use strong passwords for all your online financial accounts. Change your passwords often and avoid using the same password for multiple sites. If you store copies of financial records on your hard drive, you can password-protect either the individual files or the folders you keep them in. Digital Trends explains how to do this for both Windows and Macintosh computers.
  • Install Antivirus Software. Computer viruses and other types of malware can damage your files or cut off your access to them. To avoid these problems, install a good antivirus program on your computer and keep it up to date. Consult tech publications such as PC Magazine and CNET to find the best antivirus software for Windows machines and Macs.
  • Use a Surge Protector. Another threat to your computer is power spikes that can fry its delicate internal components. The best way to reduce this threat is to keep your computer plugged into a surge protector. Power strips with surge protection can safeguard up to a dozen electronic devices at once.
  • Keep Backup Copies. No matter how carefully you protect your computer, you can’t completely eliminate the risk that it will be damaged or stolen. However, if you keep backup copies of your files in the cloud, you won’t lose access to them even if you lose your computer. Make sure your cloud storage provider uses encryption technology so that hackers can’t easily get at your files. Alternatively, you can back up your files onto an external hard drive that’s password-protected.

Storing Personal Records

Experts disagree over where you should keep vital personal records such as birth certificates, passports, wills, and the titles to your home and car. Weltman recommends putting these documents in a safe deposit box at a bank, but other experts point out that doing so will only allow you to access the documents during bank hours. Also, if you die, your safety deposit box could be sealed, making it hard for your heirs to retrieve the contents. These experts say a fireproof safe is the best place for these vital documents.

Perhaps the safest option of all is to make backup copies of your most important documents, such as birth and marriage certificates. That will allow you to keep one in a safe deposit box and one in your fireproof safe at home.

Shredding Old Documents

Shredding Documents Bag

To protect yourself from identity theft, you have to do more than securely store the documents you’re keeping. You also have to securely dispose of the ones you’re throwing out. If you just toss documents with sensitive personal information into the trash or recycling bin, thieves can fish them out of your bin at the curb and use them to hack into your accounts.

To avoid this problem, invest in a small shredder for your home office. A crosscut shredder is best since it shreds your documents into small pieces, rather than long strips that could potentially be reassembled. It isn’t necessary to shred every single piece of paper with your name on it, but experts say it’s wise to shred anything that contains more personal information about you than you could find in the phone book.

According to Recycle Coach, most cities allow you to dispose of your shredded financial documents in your curbside recycling bin, However, you’ll probably have to contain them in a plastic bag, paper bag, or cardboard box to keep the small pieces from blowing away. Check with your local recycling agency to find out what the rules are. You can also turn the paper shreds into compost or reuse them as mulch or packing material.

One type of financial record you shouldn’t recycle is store and ATM receipts printed on thermal paper. As Recycle Coach explains, this type of paper contains a thin coating of toxic BPA plastic, which can contaminate a whole batch of recycled paper. If your town doesn’t have a special take-back program for receipts, just throw them in the trash. Fortunately, receipts don’t have much personal information on them, so there’s no need to shred them first.

It’s also important to take precautions when trashing old electronic files that contain sensitive data. If you just move these files into the trash – even if you empty the trash right away – the file isn’t permanently erased. Instead, according to the Electronic Frontier Foundation (EFF), your computer makes the file invisible and makes the space it occupied available for overwriting. Until that happens – which could be weeks, months, or years in the future – the file is still on your disk where a skilled hacker can retrieve it.

To dispose of your files securely, you need to instruct your computer to overwrite them right away after trashing them. The EFF explains how to do this on both Macintosh and Windows computers.

Final Word

Setting up a storage system for all your financial documents takes a bit of work up front, but it can save you time in the long run. Once you know exactly which documents you need to keep and for how long, it becomes a matter of routine to stick receipts in an envelope, quarterly statements in a folder, and tax returns in your fireproof safe. When you know how to deal with each document immediately, you won’t have papers piling up on every surface in your home, and you won’t risk losing important records because they’re buried in a stack somewhere.

Keeping your documents organized has other perks too. If your home is damaged in a natural disaster, your wallet or purse is stolen, or the IRS decides to audit you, you’ll be able to lay your hands on all the documents you need to deal with the problem at a moment’s notice. Organizing your financial records can even help you understand your financial situation so you have a better sense of what you can and can’t afford.

Sometimes, sorting through your financial records can even uncover missing money. For instance, you might discover a check you never deposited, a medical bill you can submit for reimbursement or even an old bank account you forgot you had. If that’s not a good incentive for getting your financial life in order, I don’t know what is.

Published at Mon, 21 Dec 2020 15:00:24 +0000

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