Q&A - Retaining Records

 

Topic:  Consumer Issues

Q:  My spouse and I differ on how long we should retain our financial records.  What do you recommend?

A:  With the approach of year-end and the inevitable need for year-end records and reports, it's likely many people are pondering their own shoeboxes bulging with old tax records, cancelled checks and stack of other financial paperwork.  What can you safely dump and what should you keep and for how long?

Tax records - Keep all tax records, including receipts for medical expenses, charitable deductions, child and dependent care services, and all W-2 and 1099 forms.   You should keep these items for at least three years after the date you file the return to which they relate because that is how long the IRS normally has to initiate an audit of your return.  But you should consider keeping them for six years, since the IRS can go back that far if you failed to report more than 25 percent of your income.  If you've filed a fraudulent return or failed to file a return, there are not audit time limitations.  Some tax records, such as those that establish the "tax basis" for business or investment assets, should be kept indefinitely. 

Paycheck Stubs - Discard them once you receive your W-2 Form, but many advisors recommend keeping the final stub for each year as a record of pension contributions and other deductions.

Housing Records - For tax purposes, keep indefinitely all records of home improvements, the purchase price, closing and selling costs, Tax Form 2119 (Sale or Exchange of Principal Residence) and other records that affect capital gain, or loss, of the sale of your home.  Keep deeds, title papers, mortgages, and so on as long as you own your home.   Even though most people will never be taxed on the gain on the sale of their home under current laws, those laws may change at some point in the future, or you may convert the property to business use, in which case the current exemption might be disallowed in whole or in part.

Cancelled Checks - Keep checks that provide proof of tax deductions for as long as you keep your tax records.  Checks for short-lived, nondeductible items you can pitch after a year or two.  Keep checks for long-lasting, high-value items such as appliances, jewelry, and antiques for as long as you own the items.  If a warranty dispute or theft or fire insurance claim arises, you'll need them as proof of purchase.

Investment Records - Retain confirmations of purchases and sales for as long as you own the asset, plus an additional six years for tax purposes.  Investment statements can be discarded each month if the new statement provides a cumulative total for the year (keep each year's final statement for as long as you own the asset).  Get rid of all but the most recent prospectus and shareholder reports.

Retirement and Pension Records - Discard outdated quarterly reports and all but the latest annuity benefit reports, but keep indefinitely records pertaining to nondeductible IRA contributions, including Form 8606.