Do I Do With...
Financial and Tax Records
Be careful when disposing of financial records. A credit
card number or bank account number could be retrieved by a thief and
used to make charges against your account. Carefully tear up or shred
any financial documents that contain account numbers, Social Security
numbers, or other sensitive information before tossing them.
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.
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
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.
Employer plans could also hold nontaxable amounts, including contributions to designated Roth accounts and – less commonly – nondeductible contributions. The IRS appears to put the recordkeeping burden for these accounts on the plan administrator, unless distributions are rolled over to an IRA and must then be reported on Form 8606.
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.
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.
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.
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
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.
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.