Drowning in old financial records?

Gary Alt |

Several years ago I was asked to look after the needs of Millie, an elderly widow. Millie was quite a character. She lived in a tumble down old house that was filled floor to ceiling with teetering stacks of old newspapers,  magazines and boxes of stuff. When I asked her why she kept it all, she said, "You never know when they might come in handy. Besides, it seems like such a waste to just throw them away."

Some people adopt a similar strategy when it comes to keeping their personal financial records. They are drowning in the stuff, but when asked why they keep them, they respond just like Millie: "Well, you never know when you might need them."

If this sounds like you, think of the following information as a life preserver.

What to keep

Tax records.  Hold onto your tax returns and supporting documentation for 7 years. If the IRS thinks you under reported income by 25 percent or more, they have 6 years to come after you, assuming they think you acted in good faith. If they think you lied to them or if you failed to file a return, you are fair game until you die, so be smart and play it straight with the IRS.

If you think you overpaid on your taxes, you have three years to file an amended return.

Retirement plans & IRA's. Most people getquarterly statements for their retirement plans plus an annual summary. Self-directed IRA's usually get monthly statements. In any case, keep your statements until you get your annual summary. After you reconcile the annual summary to make sure it accurately reflects the amount and timing of the contributions and balances on your periodic statements, shred the periodic statements and keep the annual statements as long as the account is open.

A quick word about IRA's. If you make after tax contributions to your IRA, you need to keep records showing that taxes were already paid on those contributions. You don't want to pay taxes on them twice.

Bank records. Some bank records, like cancelled checks, are useful for documenting transactions for business or tax purposes. Keep copies of these records as long as the underlying need exists. For example, if the records are important for proving compliance with the terms of a contract, keep them as long as the contract is in force. If the records are part of your tax filings, keep them as long you keep the associated tax records.

Credit card statements & receipts. Credit card fraud is a huge and growing problem. Keep your receipts until you get your monthly statement. Every month you should reconcile the statement to make sure the charges are legitimate and the amounts are correct. Once the records reconcile, shred the receipts. Hold on to any statements that contain tax-related information for seven years.

Receipts for purchases. When you buy big ticket items like appliances, cars, furniture, jewelry, etc., keep the receipts for as long as you own the item. This will be important if you ever need to file an insurance claim. A word of warning: if you're not careful, you could end up with a big box of jumbled receipts so do yourself a favor and buy an inexpensive alphabetical organizer. One of those accordion files works great. After you buy something significant, throw the receipt in the appropriate alphabetical compartment and then relax knowing you're covered in case you ever need to prove ownership.

Brokerage statements & trade confirmations. When you trade stocks or mutual funds, your brokerage firm will send you a trade confirmation showing the details of the transaction. Keep your confirms to document your cost basis for your taxes. Your monthly brokerage statement will usually give you a summary of your transactions for the month, also, but sometimes they don't have all the information you need, so look it over carefully. In any case, keep the relevant documentation for as part of your tax records.

Paycheck stubs. Keep your paycheck stubs until you receive your W-2 for the year. Compare your stubs to your W-2 to make sure the W-2 is correct and then shred the stubs. If the W-2 is incorrect, ask your employer for a corrected one.

House records. Keep track of everything you spend to purchase, permanently improve and sell your home. All these added together comprise your cost basis in your home. The higher you can make your cost basis, the more you will save on taxes. As with other tax records, keep these for 7 years after you sell your home.

A final word about security

Please be very careful about how you dispose of outdated personal financial records. They are a treasure trove for identity pirates, so make sure you shred them properly. If you don't already have one, get yourself a good cross-cut shredder. It will chop your documents into little pieces that even the most patient identify thief will be unable to reconstruct.