Broker Check

Record Retention - What You Want to Know

by Darren L. Zagarola, CFP®, CPA, PFS

As published in The Princeton Patch, December 21, 2012

I hope you all enjoyed your Thanksgiving. This time of year allows us to be thankful for this year's blessings, while we look forward to starting again in the New Year. As we approach the holidays and the end of the year, I intend to spend the next two columns discussing issues that usually surface at this time. In my next column, I will post a discussion about the New Year's financial resolutions that many people set. Today, we will discuss record retention of one's personal files.

Record retention is defined as the storage of records no longer active. Most people maintain paper files for much longer than necessary. We all have seen the overstuffed filing cabinets, the bulging shoe boxes with bank statements and cleared checks, and the user manuals for the 8-track or VCR that your parents used to own. One of the most common questions I receive as a comprehensive financial planner is “How long should I keep my files before discarding? Why discard?” This question is common this time of year as people try to organize their lives. One of the most important recommendations I can make is to shred what you don't keep.

Wondering why you can't simply ball it up and throw it away? The answer can be summed up in two simple words: Identity Theft. Paper records contain your most personal information (social security numbers, birthdates, and account numbers). With identity theft more prevalent than ever, it is good practice to shred all paper records that no longer need to be retained, effectively protecting your financial health over the long-term. As I am a socially responsible individual, I also recommend recycling the shredded paper if you can. When it comes to being green, many people opt to scan their important files and store them digitally on home computers. This is a great solution, so long as you protect those digital files. Implement reliable software and strong passwords to prevent your information from being hacked.

When it comes to “how long” to maintain most personal financial records, there are no hard and fast rules, just guidelines, with the exception of IRS regulations for income tax records. We recommend that you review and clean your files at least annually. Below is a list of the types of personal records and recommended holding periods:

  • Income tax returns and supporting documentation - The general rule is seven years. The IRS has three years to audit a tax return with the following exceptions: underreported income greater than 25% has a six-year statute of limitation and fraud has no time limit.
  • Bank statements - Maintain three months of bank statements if you are expecting to apply for a mortgage. Otherwise, shred the statement once the check book has been balanced Remember, upon request, banks will furnish you with copies of statements.
  • ATM receipts - Shred once the check book has been balanced.
  • Canceled checks - Shred once the check book has been balanced unless they are needed to support an income tax return.
  • Credit card statements - Maintain three months of statements.
  • Pay stubs -If you have the year-to-date information from the most recent pay stub, - you don't need the individual statements from throughout the year. So, save the most recent pay stub until the check book has been balanced. If you are planning on applying for a mortgage, three to six months of history may be requested, depending on the mortgage company.
  • Investment documents - Capital gains and 1099 forms should be maintained for seven years with the tax return. Confirmations of trades in non-retirement accounts should be maintained indefinitely or until the asset is sold in order to determine the cost basis and related capital gain on the sale of the asset. Then they should be included with the tax return support for the year of the sale. Prospectus can be shred or discarded immediately.
  • Medical insurance - Premium statements, doctor's bills, prescriptions, and hospital bills should be maintained five years from the date of service.
  • Home / Auto / Umbrella insurance - five years or until the asset is sold, whichever is less.
  • Home repairs - Maintain as long as you own the property, but no less than 10 years because of warranty and workmanship guarantees.
  • Utility bills - three months unless you are writing them off for tax purposes.
  • Mortgage documents - maintain as long as the mortgage is open.
  • Warranty documents - shred once you discard the product.
  • Non-deductible IRA contributions - maintain indefinitely or until the money is withdrawn from the IRA.
  • 401(k) statements - maintain annual summaries until the account is closed. Shred quarterly statements once the annual statement arrives.
  • Monthly bills - shred once the payment clears on the bank statement. Proof of purchase for larger items should be maintained for insurance reasons.
  • Receipts - maintain receipts until the credit card statement is received and
  • reviewed. Maintain for seven years if expenses are business related.
  • Auto records - maintain as long as you own the car
  • Purchase price of home and documentation of capital improvements, such as a deck or a roof repair - Maintain until the home is sold.
  • Charitable contributions - maintain receipts and acknowledgement letters with applicable tax returns.

These general guidelines should help you maintain a clean and organized financial household. While you're in organization mode, one final recommendation I will share is to take time to review your monthly bills (house related, credit cards, ATM withdrawals, etc.) and create a budget document for yourself. This will assist you and your financial advisor in developing an accurate cash forecast for your 2013 financial plan.