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, own investments, or have a Roth IRA or nontaxable amounts in your traditional IRA. 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 7, 1997, you will need the tax forms you filed regarding the sale of that home ( the old IRS 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 Accounts

Recordkeeping for retirement plans became more important with the introduction of Roth accounts and the ability to roll money from one type of account to another, including conversions of tax-deferred money into Roth (after-tax) funds.
The main recordkeeping responsibility for the individual is to track any money in IRAs that is nontaxable – that is, money on which you have already paid taxes – so that you can avoid paying tax again when the money is distributed. This includes

• Contributions to a traditional IRA that you did not deduct from income. Contributions to a traditional IRA are nondeductible only if you or your spouse are eligible to participate in an employer retirement plan and your income is above certain limits. (See IRS Publication 590)
• Contributions to a Roth IRA.
• Money that was converted from a traditional IRA to a Roth IRA.
• Roth contributions from an employer plan that were rolled over to a Roth IRA.
• Traditional (pre-tax) contributions to an employer plan that were converted and deposited into a Roth IRA.

Report these amounts on Form 8606 and track them until you take the last distribution from your IRAs.
The IRS says you’ll also need to keep your 1040 from each year that you made a non-deductible contribution, all Forms 8606 that you filed together with their supporting documents, Form 5498 annual statements showing IRA contributions or account value after distributions, plus the 1099-R forms that document your distributions. Keep these papers until you withdraw the last dollar from your last IRA.

In Publication 552, the IRS advises keeping Forms 5498 and 1099-R even if your IRAs contain only deductible contributions and growth on which the taxes have been deferred, which will all be taxed at distribution.

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.