August 28, 2017 • General Planning

Record Retention – Boring but Important (and a Time-Saver)!

Being organized and maintaining records is not everyone’s idea of fun (ourselves included). Further, it’s an up-front investment of time. Still, clients occasionally ask us whether and how long to retain certain documents so we thought it would be helpful to put together the following list. We encourage you to check with your accountant and/or estate planning attorney if you have specific questions.

Per the IRS (https://www.irs.gov), “The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.”

Assuming that you’re filing properly, the IRS can audit up to three years of returns. If returns are fraudulently filed or not filed at all, there is no statute of limitations on how far back the IRS can go. Generally speaking, we recommend keeping at least the last seven years of tax returns. And you can’t go wrong keeping all of them (although over time you may fill up a closet).

Documents that back up your tax returns, for example – W-2s; brokerage statements and tax forms; 401(k), IRA and any other retirement plan or annuity statements; K-1s and/or miscellaneous 1099s; charitable, mortgage, real estate tax, medical or other deductions – should be kept for a minimum of three years, assuming IRS filings are in good order. Personally we recommend keeping at least seven years of these types of documents. The IRS states that documentation for claims related to bad debt or worthless securities should be kept for seven years.

We recommend keeping monthly records until the time that they can be tied into an annual statement (e.g., tying W-2s to a 1099), and then disposing of the monthly records when like information is on the annual statement. In recent years, brokerage firms have been required to keep track of the basis of securities acquired but for long-held securities make sure not to throw out older statements that show basis. Records of home capital improvements should be retained for at least three (preferably seven) years after the return that showed capital gain/loss on sale.

For the most part, we believe keeping monthly bank and credit card statements will capture and provide sufficient documentation of ongoing and most significant other expenses. This should eliminate the need to retain monthly bills such as electric, phone/Internet, etc. Invoices for large purchases such as a car we’d retain for at least three tax years following a sale. Receipts for other significant valuables also should be kept for insurance purposes.

Documentation for the following should be securely stored permanently or at least as long as still in force: property and mortgage payoff records; lease agreements; life and other insurance policies; birth, marriage and death certificates; wills and related estate planning documents; alimony, custody or prenuptial agreements; stocks certificates and private investment documents.

Much of the foregoing documentation can be stored electronically, and we recommend doing so as long as done securely and with back up. Many financial institutions also make records available for the account owner for significant periods of time, and that’s an additional back up. While we don’t enjoy staying on top of record-keeping any more than the “normal” person, we believe doing so saves time around taxes, when entering into a major financial transaction and, fingers crossed that it never happens, in the event of an inquiry from or audit by the IRS.