It happens to all of us. We start searching through important documents for something specific and quickly realize we’ve managed to accumulate mounds of documents, receipts, forms, pamphlets, brochures and notes.
Keeping your financial documents in order is key to simplifying your life. There are many different ways to organize important documents, however, the question remains – what documents should we keep on-hand at all times and NEVER throw away and which are ok to keep for a while and then toss out?
Original Documents to Retain Indefinitely
While storing your documents online is a great way to keep track of many of your records, some documents are best to have readily available and NEVER throw away. Let’s start with the obvious.
- Birth and death certificates
- Social security cards
- ID cards and passports
- Marriage license
- Business license
- Adoption Papers
- Wills, living wills, and powers of attorney
- Records of Paid Mortgages/Deeds
Lifehacker.com says holding original documents associated with state and federal materials are important for two reasons. First, you want them readily available in case you need them quickly. Second, these types of documents are difficult to replace and typically require direct requests to government agencies for copies, which can take several days to weeks to acquire.
Spending time searching and organizing your important paperwork can be a headache, but it will help in the long run.
Original Documents to Retain While Active
Financial Guru, Suze Orman, recommends certain documents should be kept close while they are active. Active records are functional until they expire, are sold/cashed-in, or canceled. To avoid becoming a pack rat, the following documents should be kept ONLY while active.
- Insurance Documents
- Stock Certificates
- Property Records
- Stock Records
- Pension and Retirement Plans
- Property Tax Records
- Disputed Bills (Keep the bill until the dispute is resolved)
- Home Improvement Records (Hold for at least 3 years after the due date for the tax return that includes the income or loss on the asset when it’s sold)
Original Documents to Retain for 3 Years
While it’s good to retain certain financial documents for a period of time, you don’t have to keep them forever.
In most cases, you should keep tax returns along with any supporting documentation (W-2s, 1099s) for three years after the date of filing. After that time, the statute of limitation for an IRS audit expires.
However, as H&R Block warns, if you omit more than 25 percent of your gross income from your return, the IRS has six years instead of three years to assess an additional tax. Also, if you file a fraudulent return or don’t file at all, the statute of limitations NEVER expires.
For a complete rundown on how long you should keep your tax records, visit IRS.gov.
Aside from tax returns, there are some other documents where the 3-year limit applies.
- Medical Bills and Cancelled Insurance Policies
- Records of Selling a House
- Records of Selling a Stock
- Receipts, Cancelled Checks and other Documents that Support Income or a Deduction on your Tax Return
- Annual Investment Statement (Hold onto 3 years after you sell your investment)
Original Documents to Retain for 12 Months
Cutting the clutter every year is easy to do with the next group of documents. Suze Orman suggests once you’ve reconciled the following documents against your annual tax and investment statements, you can toss them after 12 months.
- Paycheck stubs (You can get rid of once you have compared to your W2 & annual Social Security Statement)
- Utility Bills (You can throw out after one year, unless you’re using these as a deduction like a home office –then you need to keep them for 3 years after you’ve filed that tax return)
- Cancelled Checks (Unless needed for tax purposes, then keep for 3 years)
- Credit Card Receipts (Unless needed for tax purposes, then keep for 3 years)
- Bank Statements (Unless needed for tax purposes, then keep for 3 years)
- Quarterly Investment Statements (Hold on to until you get your annual statement)
Proper Disposal of Documents
When you’re ready to toss old and unnecessary documents, make sure you dispose of them properly. Simply throwing out your sensitive documents is not enough. Your financial documents need to be properly shredded and disposed of to prevent identity theft and fraud.
Safekeeping of Documents
Also, it’s important to note that when holding onto vital documents, such as estate planning files or life insurance policies, it’s crucial to keep them in a safe place such as a safe deposit box or a fireproof box in case of a fire or flood in your home.
AARP provides a list of documents you should keep in a safe deposit box and in a fireproof box at home.
Maintaining and updating your files every so often, whether you store them digitally or in paper form, will not only benefit you if problems arise, but will also help save you time and money.