Friday, July 17, 2020

Financial Documents: What To Save And What You Can Throw Away

Written by: Kevin Payne Contributor

If you’re like many of us, the amount of paper that enters your home is hard to handle at times. From mail to receipts to documents, it’s a challenge to keep it all organized. While many businesses are moving toward paperless systems, it doesn’t feel that way when you look at the piles of financial papers in your home.

As you make life and financial decisions, there’s usually a paper trail. The same is true when you buy, sell or insure something. And after tax time every year, there’s another stack of documents to add to your files. What should you save, and what’s okay to toss in this week’s trash collection—by which we mean, what needs to be shredded and disposed of properly?

The main reason for filing away financial documents is to be able to defend your annual tax returns if needed, but there are other reasons to save certain types of paperwork. Here’s a quick guide to what to do with your financial documents: how long you need to save the important ones, how to store the documents you do retain and how to safely dispose of the rest.

How Long Should You Keep Financial Documents?

Some financial documents should be kept for the long term. Here’s a breakdown of documents to save, based on the time they should be kept.

Seven Years or Longer

When it comes to taxes, it’s best to keep any tax records for at least seven years. The IRS statute of limitations for auditing is three years. However, there are circumstances where they can go back as far as six or seven years, for example, if you underreported income by 25% or more. State statutes of limitations can vary, so check with a tax professional on the limitations in your state.

Your best bet is to hang on to your tax returns as long as possible. If you ever face a tax audit, then you’ll have all the information you need. You also should consider saving documents that verify the information on your returns for at least seven years, like W-2 and 1099 forms, receipts and payments. If you have receipts related to assets, like receipts for home remodeling projects, keep these for as long as you are the owner.
One Year

Documents that fall into this category include non-tax-related bank and credit card statements, investment statements, pay stubs and receipts for large purchases. Keep these records on hand for a year if you need them to support your current-year tax preparation or as proof of income when making a large purchase.

The Federal Trade Commission suggests holding on to your paid medical bills for a year before tossing them—unless you have an unresolved insurance dispute, in which case you would retain the medical bills until the dispute is resolved. Medical bills are confusing, and having records on hand to dispute payments or errors is wise.

Many banks and credit card issuers offer electronic statements now, so you may not need to keep paper copies on hand, which will cut down on excess clutter. If keeping other documents around longer term makes you anxious, you can opt to scan them to create electronic copies and then dispose of the original paper documents.
Less Than a Year

Some documents don’t need to take up valuable space in your home for very long. For example, don’t worry about keeping receipts unless they pertain to:

  • Products under warranty
  • Your tax returns
  • Insurance claims

You can toss most monthly bills after you pay them, or after the payments have credited to your bank statement. If you end up needing to go back to verify anything, see if you can access past bills through online account access. Many companies keep past bills and invoices available online for the past few months or longer.

Banks typically don’t mail canceled checks back to you anymore, but if yours does, most canceled checks are okay to shred once you’ve verified your bank statement is correct. Some canceled checks should be saved, though, if they are related to tax returns, like any charitable giving.

What Financial Documents Should You Keep Forever?

We’ve looked at documents that are okay to throw away after a specific time, but there are plenty of documents you should hold on to indefinitely. Important papers to save forever include:
  • Birth certificates
  • Social Security cards
  • Marriage certificates
  • Adoption papers
  • Death certificates
  • Passports
  • Wills and living wills
  • Powers of attorney
  • Legal filings
  • Military records
  • Retirement and pension plans
  • Inheritance documents
  • Beneficiary forms

For anything you’ve bought or insured, you should save the related documents for at least as long as you own them or until the warranty ends. It won’t hurt to keep them around longer, though, just to be safe. This includes titles, deeds, insurance policies, warranty documentation and more.

Health insurance policies and related documents are important to keep long term, too. So long as your health insurance is active, you should keep these records. If your coverage ended or you’ve moved to another insurance company, go ahead and toss paperwork once you’re sure you won’t need it. The same is true if you receive disability or unemployment benefits. Keep the documentation until you know you no longer need it.

If you have financial records or documents you aren’t sure you’ll need, err on the side of caution. Keep any documents until you are positive you don’t need them.

How to Store Financial Documents

You can cut down on clutter by creating a reliable system for storing your financial documents. Keeping your documents safe is equally important. When storing your documents, you’ll want a storage solution that is:
  • Easily accessible
  • Protected from theft
  • Protected from the environment/weather/damage
  • Well organized

Whether you have paper documents or electronic versions, here are options for storing your financial documents safely long term.
Paper Storage

Many people choose to keep documents stored in a filing cabinet. Use file folders to organize paperwork by subject, year or another method of your choice. Bankers boxes are another storage option, but these are more susceptible to water damage.

For your most important documents, a standard filing cabinet might not be enough. The use of a home safe may be a better option. Look for a safe that is fireproof and waterproof for maximum protection. A home safe doesn’t have to be elaborate or expensive, like something you’ve probably seen in the movies (no need for hidden wall safes behind artwork). A simple lockbox you can grab and go is perfect for storing documents in the event of a home fire or flood.

Safe deposit boxes used to be a popular method for storing valuables, including essential documents. Not all bank branches offer safe deposit boxes today, but it can be an option if you prefer keeping these documents offsite. Keep in mind that you are at the mercy of the financial institution as to when you can access your safe deposit box.
Electronic Storage

If you’d like to move toward less paper, there are plenty of digital storage options.

Many financial institutions and businesses now let you opt for electronic billing and statements, either through email or online account access. Some banks charge a fee for paper statements now, as electronic paperwork becomes more readily available.

For other documents, you can use a scanner to scan them into your computer, or you can take photos using your cell phone.

Keeping all of your documents on your computer isn’t very efficient and can bog down your system. Other digital storage options include external hard drives, like HDDs and SDDs, which are compact solutions for storing massive amounts of electronic data. An even more compact solution is storing electronic paperwork on a flash drive, although flash drives also are easier to misplace or damage.

If you go the digital route, it may be a good idea to create multiple backup copies in case one of them is damaged or fails. Digital backups take up much less space than having multiple paper copies of your important documents.

Another option is to go with cloud-based storage for essential paperwork. The past several years have seen an explosion of cloud-based solutions, including:
  • Dropbox
  • Google Drive
  • Microsoft OneDrive
  • iCloud
  • Amazon Cloud Drive
  • Box
  • NextCloud
  • iDrive
  • Carbonite

Using cloud-based storage not only saves on space, but also can be great for organizing and keeping your documents secure, since most services guarantee protection through encrypted networks. Many cloud-based solutions allow access through mobile devices, making your documents accessible almost anywhere in the world.

If you do end up choosing a digital storage solution, make sure you don’t need a physical copy or original document in the future. The last thing you want to do is shred something to save space, only to need it five years later.

How to Dispose of Old Financial Documents

Clearing your home of piles of old, useless paperwork is a wonderful feeling, but don’t scrap it with your weekly garbage collection. Most of these documents contain personal information you don’t want to have exposed.

According to a Federal Trade Commission (FTC) report, over 3.2 million consumer reports were filed with the Consumer Sentinel Network in 2019, and 20% of them involved identity theft. Throwing away documents with your trash exposes your information to anyone willing to do a little dirty work to steal your identity. You might not realize how much information is present on your old bills, statements, voided and canceled checks and other financial documents.

Here’s what could be present on the documents you want to throw away:
  • Full names
  • Physical addresses
  • Phone numbers
  • Account numbers
  • Routing numbers
  • Driver’s license numbers
  • Policy numbers
  • Usernames
  • Passwords
  • Membership information
  • Medical records
  • Signatures

Your best option is to shred any documents that contain sensitive information before tossing them. Either invest in a shredder for your home or utilize a professional shredding service. You will likely pay a fee for this service, but it’s a small price to keep your personal information safe.

Here are some retail stores that offer shredding services:
  • Office Depot
  • Office Max
  • Staples
  • The UPS Store
  • FedEx Office Print & Ship Centers

Many cities also hold free paper shredding days for residents. Check your city’s website for information regarding events like this.

A financial life necessarily involves a significant amount of documentation—from monthly bank statements to insurance documents to the various materials required to file your taxes. By learning what needs to stay and what’s free to go, you can minimize the amount of materials you accumulate over time.

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