Living in an increasingly paperless world has its benefits, but when it comes to records preservation, does it make a difference? Sure, digital recordkeeping on the cloud means more storage space, easy access, and less vulnerability to inadvertent destruction. But the questions of what to keep and for how long feel just as confusing as ever.
To Keep or To Shred
Whether your files are physical or electronic, the same principles and time frames for record retention apply. Check out some of our rules of thumb to consider for a few common financial documents. Keep in mind, this list is not exhaustive, and professional responsibilities and potential liability risks may vary.
ATM Receipts, Deposit Slips, and Credit Card Receipts. In general, you don’t need to hold onto monthly financial statements after you verified your transactions—unless statements include tax-related information. Keep in mind, if you dispute a transaction included in a statement, in most cases, you have 60 days from the statement date. Beyond 60 days, the bank may be alleviated of liability associated with the charge—so you may be on your own to try to get your money back.
Paycheck Stubs. Once you receive your annual W-2, it’s usually not necessary to retain your paystubs from the prior year. You may want to keep your year-end stub if it includes any tax-related information not reported on your W-2. Additionally, if you anticipate a life event soon that will require proof of recent income—applying for a home loan, for example—then plan to hang onto pay stubs from at least the past two months.
Tax Returns. Determining when to purge tax returns usually depends on how long the IRS has to contest a given year’s return. In most cases, it’s three years—assuming tax returns are filed properly and do not contain any knowingly fraudulent information. The time frame can extend up to six years for severely underreported income, and there’s no time limit for the IRS to contest fraudulent returns. The same timing applies to the supporting documentation used in preparing a tax return, so you should also retain the financial and tax documentation—investment statements showing gains or losses and evidence of charitable contributions, for example—pertinent to the corresponding year’s return. If you’re unsure how long you should keep a specific tax return and accompanying paperwork, be sure to check with your accountant. Additionally, the IRS offers some useful information on time limitations that apply to retaining tax returns.
Old 401(k) statements. Once you’ve confirmed your contributions are recorded accurately, there’s little need to keep each quarterly or monthly statement. It may be a good idea to keep each annual summary until the account is no longer active.
Estate planning documents. Although there’s usually no distinction about whether records need to be retained in paper or digital form, there are certain instances where it’s essential to have original legal documentation with the “wet” signature. This requirement holds true for estate planning documents. In most circumstances, a court will only accept a decedent’s original last will and testament—a copy will not suffice. If you’re unable to produce the original, the court may presume it doesn’t exist, deeming the copy invalid. There may be legal avenues you can pursue to get the court to accept a photocopy of a will, but this could prove to be a costly and stressful process.
Get Organized and Be Sure to Shred
A good records-filing system is essential to helping you maintain and easily access important documents. If you’re storing things digitally, you can retain much more than any filing cabinet could hold, making it easy to take a more liberal approach to what you save. Keep in mind, the retention guidelines for many documents aren’t clear-cut. When you’re unsure, start by assessing what purpose the document may serve in the future. It’s always important to consult the appropriate financial, tax, or legal professional for advice on specific records. Finally, remember when it comes to materials that include personal information, if you’re not keeping it, then you should be shredding it. Our clients are always welcome to drop their documents in our shed bin.