Financial Records: Save or Shred?

Summertime would be a good time to get organized financially while the pace of life is, hopefully, a little slower.

Just being organized enough to pay bills on time can have benefits, such as helping you avoid late charges, not exceed credit limits and maintain your credit rating. Gathering all your important documents — will, durable power-of-attorney, living will and so on — in one safe place will go a long way toward giving you peace of mind.

The same holds true for financial records. However, some of us are pack rats keeping everything, including those receipts for toothpaste, gum and double lattes! Others are so paranoid about identity theft they rush to the shredder at the first chance. There is a happy medium and a rule of thumb for what to keep and what to shred.

A handy rule of thumb

• Tax records: Keep records for at least seven years. The IRS has three years to audit your return if it suspects good-faith errors. It has six years to challenge your return if it suspects you underrepresented your gross income by 25% or more. However, there is no time limit if you did not file a return or filed a fraudulent one.
• Home purchase/improvements: Keep all records related to home purchase and sale plus permanent home improvements, such as renovations and additions, for at least seven years after you sell the property. Costs of improvement and expenses in selling are important for tax purposes.
• Retirement plans: Save the quarterly statements from your 403(b), 401(k) and other plans until you receive the annual summaries. If the numbers agree, you can shred the quarterlies. Keep the annual summaries until you close the account.
• IRAs: Keep records of your non-deductible IRA contributions so you can prove you've already paid taxes when it comes time to withdraw.
• Bills: Review your bills annually. Once you receive the cancelled check or credit card statement, you can shred the bill. However, bills for big-ticket items, like cars, furniture, computers, appliances and such, should be kept for insurance purposes in case you have to file a claim for loss or damage.
• Credit card records: Save your receipts until you can reconcile them with your monthly statement. Keep the statements for seven years if they contain important information related to taxes, home ownership and so on.
• Checks: Review your checks annually and save those related to taxes, home improvement, mortgage payments and business expenses. Shred the ones with no long-term impact. Save your bank statements for seven years, especially if they document tax-related purchases.
• Pay stubs: If you still receive paper paychecks, hang on to them until you can review your annual W-2 form to ensure the information matches. Shred them if it does; otherwise, ask your employer for a corrected form called a W-2c.

Time spent getting organized may well pay dividends in the long run by helping you avoid costly mistakes.