How long should you keep financial records and important documents?

By Carl Lachman, MBA, CFP®

There Are Two Kinds of People

            According to various movies and other experts, there are two kinds of people. For example, one movie says, “There are Ford people and Chevy people.” Another says, “There are people who like Neil Diamond, and those who don’t.” And a final expert says, “There are people who finish what they start, and so on…”

            When it comes to keeping financial records and other important documents, there are hoarders and purgers. There are people that keep everything and people that want to get rid of everything. Maybe you don’t like those terms? How about savers and Spartans? Whatever you call them, you do not really want to be either of these.

The Problems with Saving All Records

            Why not save it all? It is an option, but it’s not great. You will have to devote time to keeping everything organized or it will be hard to find things when you need them. The records will take up a lot of space, there are numerous insects that eat paper, and boxes full of paper are heavy to move. Also, your heirs will have a lot of work sorting and going through things when you are gone.

            Perhaps you think that you can scan everything or simply download statements? In these cases, you can have everything on a computer hard drive or in an online cloud service. Even if you decide to keep everything in a digital format, it will cost you a lot of time and money. Have you ever tried scanning documents? Unless you are willing to invest thousands in a fast, vacuum-feed scanner, it will take a lot of time, papers will get jammed, and little receipts will have to be handled a separate way. There are photo scanning apps for cell phones which work well, but a stack of papers takes a lot of time to scan this way. Plus, make sure you have a physical hard drive backup, as well as an online backup. Hard drives do eventually die.

            Maybe there are better uses of your time and money?

The Problems with Saving Nothing

            In Sweden they call it “döstädning” or “death cleaning”. This is going through all of your things and sorting, organizing, and decluttering them so that your heirs are saved from the burden of doing it when you die. Sounds like a helpful idea, but not if you toss all your financial records. That can leave a difficult detective problem for your heirs.

            Others approach life with a “fast and light” approach, getting rid of anything they don’t need because it will otherwise slow them down. I do this when I backpack, but there are problems if you approach your important records in this way.

            If you do not save the right financial papers, for instance, you could easily pay more in capital gains taxes when you sell your home. If you do not keep supporting tax records, you might not be able to justify your deductions when you are audited. If you do not keep the original, signed version of your will, your heirs will have trouble convincing a probate judge the photocopy they have is valid.

            As a sub-note, there are more problems converting everything to digital records that were not mentioned above. Digital records or scanned copies can only be the primary source in some circumstances. There are circumstances where only the original will be accepted. Plus, does your spouse and your heirs know where these digital records are kept on your hard drives and old computers? Do they know your password? If you go this route for a lot of records, make sure you have a digital records and digital access paragraph in your wills and trust. A good estate planning attorney will know exactly what I am talking about.

Shred and Destroy, Don’t Actually Toss

            When it comes to getting rid of old documents and records, do not just toss them in the garbage. I wrote “Toss” in the title of this article, but do not take that word literally. Instead, shred them and destroy them. Identity thieves are very shrewd at piecing together your financial lives so they can steal from you, and if you give them a bag of financial records, you are making their job easy. You can buy a cross-cut shredder, but you will have to pay quite a bit for one that can shred more than around 3 pages at a time. Instead, ask your financial advisor if they have a shredding service that will destroy your documents for free. We do this for our clients and have an annual drive-thru shredding day when they can drop off boxes of old documents.

Here are Some Guidelines on What to Keep

            The following sections have some brief guidelines of what you should save and for how long. Also, click here to see our more detailed list of “Recordkeeping Guidelines.”

Keep Forever

            You will want to keep your tax returns as either a permanent digital record or hard copy. Not every supporting document, but just the returns. Also, make sure you keep the following in the original form: birth and death certificates, Social Security cards, marriage licenses, divorce papers, military discharge documents, wills, and trusts. And keep the following in at least digital form forever: IRA contribution records, life insurance policies, real estate purchase and sale documents, and records of major financial events (legal filings, inheritances, etc.).

            Generally, you want to make sure you always have the most recent originals of wills, trusts, powers of attorney, amendments, codicils, and advance health care directives. But you probably also want to keep an old out-of-date copy of each that has a big “X” across each page. Why? To prove what the old documents said and that they have been replaced. Be careful with this, though, and make sure your records are clearly marked up so there is no confusion between the new and old documents. Make sure you clean up your files and get rid of all drafts of old documents.

Keep 3 to 7 Years

            The IRS can ask you for supporting tax documentation for 3 to 7 years after you file a return. If you plan to illegally evade taxes or file fraudulent taxes, the IRS has no time limit for when they can come after you, so take note if you are planning on a life of crime! Supporting tax documentation includes the following: canceled checks, receipts, tax deductions, W-2s, 1099s, bank statements, brokerage statements, tuition payments, charitable donation records, medical bills, etc.

            Although a lot of recordkeeping guidelines are driven by IRS requirements, your insurance company and creditors may have different recordkeeping requirements. So, depending on the level of materiality (relevance, significance, or amount of money on the line), make sure you understand the documentation you might need to have for a future claim.

            An example of this is a client that had an environmental cleanup project on a piece of real estate. The need for the cleanup was not understood until about 30 years after a tenant spilled chemicals on the land. Our client was able to file a claim and receive compensation from the insurance company that insured the property 30 years ago. If our client had not kept good records, he would not have been able to collect $250,000 from that prior insurance company.

This is a good time to remind everyone reading this article that these guidelines are only guidelines. I know a few things about recordkeeping, but I cannot anticipate all future situations that you might encounter. You need to use your own good judgement, too.

Keep 1 Year

            Keep a hard copy of your various monthly statements for bank accounts, credit cards, brokerage accounts, investment accounts, etc. Increasingly these statements are available for several years online from the companies that provide these services, so you might be able to skip the hard copy. But make sure you know how to log in and access your online statements and have a good system of recording your login and password credentials.

Apple, Google, and Microsoft all provide good password management systems built into their software and there are independent password apps from Dashlane, 1Password, LastPass, and others. There are also physical password keys you might want to consider from Yubico, Titan, and uQontrol. Which one is best for you? I am not sure. All these systems have strengths and weaknesses, and you should research and compare several since I am not a software expert.

            Additionally, don’t forget to turn on some sort of two-factor authentication (2FA) system for all of your online financial accounts. A two-factor authentication system is when you log in and then get a text message with a number that you also must enter to gain access. There are also 2FA systems that use apps on your phone to generate these additional numbers.

Keep 1 Month

            Most people do not need to keep utility bills, deposit records, withdrawal receipts, cable bills, or cell phone bills for more than a month. You can dispose of these once the transaction is complete and you have checked your monthly bank statement. Bear in mind that if you are self-employed, you may need these records for tax purposes for 3-7 years.

Use Common Sense

            I am sorry most of these guidelines are not definitive and that you will need to use your own judgement. If you have taken the time to read this article, then you are a thoughtful person and I think you will make good decisions using your own common sense and discernment. Remember, the chance that any individual record will be needed is likely a low probability event, so keep enough, but not too much.

Ask Your Financial Advisor

            Do you have a trusted fee-only financial advisor that puts your interests before their own? Advisors at our firm regularly field client questions about all aspects of personal financial planning, including those questions about saving financial records. Part of our service is being available to be a sounding board and being willing to think through tough decisions. Our all-inclusive fee covers the entirety of our clients' financial lives. If you schedule a free meeting with me and let me tell you more about Eclectic Associates, I will be happy to answer your recordkeeping questions. Click here to schedule an appointment.