What
Do I Do With...
Financial and Tax Records
Privacy issues
Tax Records
You should keep a copy of income tax returns and the supporting documentation (receipts and worksheets) for several years. The Internal Revenue Service has three years to audit federal income tax returns. However, this limit does not apply in unusual cases. If you failed to report more than 25 percent of your gross income, the government has six years to collect the tax or to start legal proceedings. Also, there are no time limitations if you filed a fraudulent return or if you failed to file a return. That means keeping records for at least three years and probably six years after an expense was incurred or after the final disposition/sale/withdrawal of an asset—or for three to six years after you filed the tax return based on that action, if you filed late.
However, there are some situations where you will need to refer back to your older tax returns for much longer than that. Three examples are when you own a home, have a non-deductible IRA contribution, or you have business or rental property that you are depreciating over a number of years. Read on for more information.
You can also check IRS Publication 552, Recordkeeping for Individuals.
Home purchase, sale, and improvements
Keep records about how much money you have invested in your
home. Before May 7, 1997, profit from the sale of one home was usually
rolled into the purchase of the next home. If you sold your previous
home before May 6, 1997, you will need the tax forms you filed regarding
the sale of that home ( Form 2119, Sale of Your Home), and
the supporting documentation, to calculate your profit when you sell
your current house. If you sold your previous home after May 6, 1997,
you only need the records for the purchase of your current home.
You will also want to keep receipts for any improvements or additions
made to your home, since this increases your investment (basis) in
the property and may reduce your profit and tax, if any, when you
sell. See IRS Publication 523, Selling Your Home.
Investment
or brokerage statements, including documentation of purchase of stocks,
bonds, mutual funds and other investments
Keep the statements that show what you paid for each investment purchase,
including any commissions or fees. If you reinvest dividends (use
the dividends to automatically purchase new shares of the investment),
you will also need records showing the dollar amount of those dividends.
The sum of these items is your basis, or cost, in the investment.
You will need these records to calculate your capital gain (profit)
or loss when you sell the investment. If you sell only part of an
investment (i.e., you own 300 shares of Mutual Fund ABC, and you
sell 100 of those) keep records of your basis for that sale, so that
you can calculate your basis and gain when you sell the remaining
shares.
Retirement plan statements, such as 401(k), 403(b), and
457 plans, and SEPs and SIMPLE Accounts
With one possible exception, all of the money will be
taxed when you withdraw it, since neither your contributions nor
the growth in the account has been taxed previously. Therefore,
there’s
no need to keep statements from these accounts for tax purposes.
Use the statements to verify that the money deducted from your
paycheck or contributed by your employer has been deposited, and
you may want to keep annual statements to track performance.
Here’s the exception: If you make non-deductible contributions to your retirement plan, you’ll want to keep track of those contributions so that you can calculate the portion of each withdrawal that ISN’T taxable. Your account statement should indicate if you have made non-deductible contributions.
If you made a nondeductible contribution to a regular IRA, you have already paid tax on that amount. Save the income tax form on which you reported those nondeductible contributions (IRS Form 8606) so that you can accurately calculate the taxable part of your distributions when you withdraw money from the account. Otherwise, you might end up paying tax again on those contributions.
If all of your contributions to traditional IRAs were deductible, you do not need any records for tax purposes since all of your distributions will be taxed. However, you may want to keep annual statements to track the performance of your investments.
Roth IRA statements
If you take distributions according to IRS rules, you will not owe any income tax on the distributions. You have already paid income tax on the money you contribute to a Roth IRA, but not on the earnings. As a result, you can withdraw contributions from a Roth IRA at any time without tax or penalty. So keep records of your contributions, just in case.
Bank Account Records [Back to top]
Cancelled checks, deposit slips, ATM receipts,
debit card receipts
For peace of mind, keep all of these items for about a year.
But once you’ve verified that the transactions have been correctly
reported on your statement, the only items you need to keep long-term
are ones you need for tax records (such as deductible expenses) or
important proofs-of-payment, such as major appliances still under
warranty. You may find it convenient to use an envelope to hold all
these items until you have checked them against your statement.
Account Statements
Some financial experts say you only need to keep bank account statements
for a couple of months. But after being audited, the editor of Kiplinger's
Personal Finance Magazine recommended keeping bank statements for seven
years. You may be able to obtain statements from your bank if you need
them. If so, you may decide to keep only a few months of statements.
Credit Card Documents
Keep all credit card receipts until you have verified that the transactions
have been correctly reported on your statement. Keep receipts you
need for tax records according to the guidelines for tax records.
Keep receipts that are proofs of purchase until the warranty has
expired. For convenience, you may want to keep credit card receipts
for about a year. If a charge shows up that you believe has already
been paid, you can easily check your previous statements.
Receipts [Back to top]
While you don’t need to keep most receipts long-term, sorting through them can be a hassle. Try this simple approach that gives you a loosely organized system with little effort.
- Select a container that will hold a year’s worth of receipts to serve as your receipt box. Label it Receipts and add the year, for example, Receipts 2004.
- Put your receipts into the box when you bring your purchases home or when you empty your wallet. By default, the receipts are generally in chronological order. If you should need to locate a receipt, you can dive into the part of the stack that covers that time period.
If you REALLY want to be organized, add the following steps:
- Give special treatment to some receipts.
- Label a separate envelope or file for each credit card and debit card you use. File your receipts in these envelopes until your credit card or bank statement comes. Check the statement against your receipts. Then transfer them to the receipt box.
- Receipts for items with lengthy warranty periods, such as a major appliance, should be kept longer than most receipts, perhaps stapled to the warranty.
- File receipts that are documentation of tax-related expenses with your tax records for that year.
- At the end of the year (Dec. 31), start a new Receipt 2005 box and move the 2004 box to your dead storage area. That might be a box under the bed or a shelf in the basement.
- Keep one or two years’ worth of receipts in dead storage. When you place the new stack in the dead storage, remove the oldest stack and toss it. You may want to shred receipts that have credit numbers or other sensitive information on them.
Bills (Unpaid and Paid) [Back to top]
Most bills do not need to be kept long term after they’re paid unless they represent tax-deductible expenses. Some people only keep utility bills until the next month’s bill comes and they have verified that their payment has been credited to the account.
To keep bills organized with a minimum of sorting and managing, follow this simple procedure.
- Label two envelopes or file folders, one for Bills to Pay and one for Paid Bills that includes the year, such as Paid Bills 2004. Keep them both in your bill paying area.
- As bills come in, put them in the Bills to Pay folder.
- When you pay a bill, move it to the Paid Bills folder--except those that are needed for income tax records. File those with your current year tax information.
- At the end of the year (Dec. 31), you can either toss most of the paid bills or move the file to your dead records area. That might be a box under the bed or a shelf in the basement. Dead storage doesn’t need to be very convenient. Keep one or two years’ worth of bills. When you add a new year’s bills to the dead storage area, remove the oldest year’s bills and either toss it or shred them.
Medical Bills
Medical bills may need to be kept longer than most other bills or receipts. You and one or more insurance companies pay portions of these bills, making it hard for you and for the healthcare providers to keep accurate records. Many people report receiving bills from a doctor or hospital for an expense that was several years ago, that was never submitted to insurance for payment, or that the patient already paid.
On the medical bill, make a note of when and how you paid (check number or name of credit card), and the amount. You may also want to keep proof of insurance payments. You will have to decide how long to keep these records. If you have had billing problems with a particular healthcare provider in the past, you may want to keep those records for three to five years or more.
Pay stubs
Keep pay stubs until you get your W-2 at the end of the year. Once you’ve checked that the amounts match, you don’t need the pay stubs. If you have direct deposit and your checking account number is on the stub, shred it.
