August 13, 2020
This year might as well be the year you sort out which financial records you keep around and which you can finally get rid of. The question is which is which?
Fear of an IRS audit nudges many of us into “better safe than sorry” territory but learning the reasons for how long you should keep financial records are straightforward and easy to follow. Follow these guidelines to streamline your files and piles.
RECONCILE AND TOSS
- Credit card statements and bills for non-deductible items. Since the IRS does not consider credit card statements to be sufficient documentation, there’s no reason to keep them around once you’ve confirmed all the charges and have proof of payment.
- Routine debit or charge receipts. Toss routine receipts once you’ve confirmed the amount charged to your debit or charge card is correct.
- Social Security statements. Keep the most recent one, and then toss it when the next one arrives.
KEEP UP TO SEVEN YEARS
- Health explanation of benefits. Keep these on file for one year.
- Utility records. Some states recommend you keep these at least three years.
- Bank statements and checks. If your online bank or credit union records go back seven years, you’re free to toss out your paper statements. Otherwise, keep bank records and cashed checks for seven years.
- Investment and real estate records. These records will help document your cost basis as well as the taxes owed at the time you sell. Keep the annual summaries.
KEEP UNTIL SOMETHING ELSE HAPPENS
- Pay stubs. Keep all your pay stubs until the end of the year. You can toss them out once you receive your W-2 for that year.
- W-2 Wage and Tax Statements. Keep your W-2s until you start receiving your Social Security benefits. These are your best proof of earnings to help verify your benefit amount.
- Insurance policies. Keep insurance policies until they expire, then toss. With one exception — occurrence policies. These types of records cover you for damages that happened during the time the policy was in force, even if the claim is made later. Keep those permanently.
- Receipts for big-ticket items. Keep these receipts as proof of purchase for returns or repairs.
- Receipts for donations and business expenses. Keep these along with your tax returns for the year they occurred.
- Tax returns (including supporting receipts, documents, and worksheets). You will often hear that the IRS has three years to audit a return once you’ve filed; however, that limit only applies to errors made in good faith. If the IRS believes you’ve under-reported your income by 25% or more, it can slap you with an audit up to six years later, leading to the oft-quoted seven-year figure most experts recommend for keeping your tax records. But the real truth is that there is no statute of limitations for IRS action if it suspects you of filing a fraudulent return. This is a case where you’re better safe than sorry; keep all tax returns and records permanently.
- Canceled checks for tax payments. Keep your canceled checks for quarterly and annual tax payments.
- IRA contribution records. You may need to document your IRA contributions when you finally withdraw them during retirement to keep from paying too much tax. Avoid the tax-keeping hassle by converting your retirement savings to a Roth IRA.
- Brokerage statements. Keep statements for taxable accounts on hand permanently to demonstrate the cost basis.
Following these guidelines will help you understand how long to keep financial records so “better safe than sorry” becomes second nature.