Purge The Financial Paperwork: What To Keep Or Trash For Taxes

Fear of being audited leads many people to become paperwork pack rats. Tax season is a good time to face those fears and free yourself of paranoia — along with that bulging filing cabinet.

Here’s what you need to know so you can purge without fear:

Electronic records are better than paper. The IRS accepts electronic records, so there’s typically no reason to hang on to a statement or other piece of paper just because it was issued by your bank or other financial institution. Scans of the originals are acceptable, and consider going paperless by getting your statements electronically. Make sure you back up your data and consider keeping a copy off site, either in physical form (such as on a CD or USB drive) or encrypted in the cloud.

Few documents are irreplaceable. If your biggest worry is that you’ll shred something you’ll need later, take heart. Most documents can be re-created. Banks and brokerages keep electronic versions of your statements for at least six years and sometimes more, though they may charge you to get new copies. Your biggest risk of being audited is in the first three years after you file a tax return, although that limit can be extended to six years if you under-report your income by 25 percent or more. (You may hear tax experts say to keep paperwork for seven years. What they mean is seven years from the relevant tax year. So if you file your 2014 return on April 15, 2015, you’ll want to keep those records until April 15, 2021—seven years from 2014.)

Some documents should be kept longer. Paperwork that relates to a potentially taxable investment or asset, such as real estate or your stock portfolio, should be kept for as long as you own the asset plus six years after you file the relevant tax return. But again, you needn’t hang on to paper—scans are fine. Many tax pros recommend hanging on to your actual tax returns for life, although you’re welcome to shred the supporting documentation after the audit risk has elapsed.

Keep the summaries, ditch the rest. If you’re still getting paper trade confirmations, you can discard them once you compare them to your brokerage statement. If your brokerage issues year-end statements, you can discard the monthly ones. You can discard pay stubs once you get your W-2 and compare it to the summary on your year-end pay stub. ATM receipts and deposit slips can be shredded if they match what’s shown on your statements. Once you reconcile credit or debit card receipts with your statements, keep only the ones that are needed for tax purposes or that document a major purchase. Worried you may need receipts in case of problems with smaller purchases? Set up a file each quarter for miscellaneous receipts, and discard them after six months or so have passed.

Purge your retirement accounts files. Your IRAs, 401(k)s and other retirement accounts don’t qualify for capital gains tax treatment, so there’s no need to keep track of what investments you bought when. The only thing you need to retain is documentation of any nondeductible contributions, which you should have been reporting on your annual tax returns using Form 8606. You should keep those forms indefinitely, along with the Form 5498s your IRA custodian sends you that summarize your account activity for the year. If you transfer your accounts—you roll your 401(k) into another employer’s plan or change IRA custodians—keep that paperwork as well. One other exception: you contributed to a 403(b) account before 1987, keep your old account statements indefinitely to prove you made the contributions. This money doesn’t have to be withdrawn until age 75, while other retirement money generally has to come out earlier.

Clear out the rest. If you don’t need a document for tax purposes, you often can discard it when it’s replaced by a new one (in case of insurance policies, for example) or you no longer own the relevant item (such as receipts, warranties or owners manuals). Again, when in doubt, scan the item so you have an electronic record if it turns out you need one.

Documents to keep forever in paper form. We’re still not a paperless society, and it can be a hassle to get certain documents—such as birth, marriage, death and title certificates, licenses, deeds, Social Security cards, military service records and divorce decrees—re-created if we need them. Keep these secured in a home safe or safe deposit box.

 

The foregoing information is provided by City National Bank (CNB). Unless otherwise stated, opinions expressed are those of the respective authors and not necessarily those of CNB. The information is provided without warranty and no recommendation or endorsement by CNB is intended or should be inferred unless specifically stated.

Visit City National Bank’s News & Insights for small business tips, trends and updates.

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