When preparing for our financial planning meetings, we occasionally ask clients for various financial statements - be it insurance statements, tax returns, etc. At times, we’ll request to see documents that go a few years back. And during tax season? If you’ve ever been audited by the IRS, you better believe they’re going to ask for anything and everything they can. It’s one of the only courts where failure to produce your financial documents constitutes tax fraud.
How do you know what you need to hold on to? And for how long? It can be easy to start hoarding documents for fear that you might need them again someday. To help you avoid the pile-up, here’s our list of the financial documents you need to keep, and how long you can expect to hang on to them.
Brokerage Statements/ Retirement Account Statements
Depending on your account, you’re likely receiving monthly or quarterly financial statements until you get your annual statement. Though most financial institutions will have a stored copy of these statements, go ahead and keep a copy of those monthly or quarterly statements until you receive your annual statement. Once you have your year-end statement, you can shred the smaller statements. Keep a copy of your annual statement forever, as well as any IRA nondeductible contribution records. Even though many custodians will keep electronic copies of your account statements, it’s always better to err on the side of caution when it comes to dealing with the IRS.
Every month you should receive a statement from your bank for your bank accounts, whether it’s by mail or electronic. A good rule is to keep a copy of these statements for one year. An exception to this rule would be those bank statements that reflect a tax-related purchase, such as home improvements, business expenses, etc. In these cases you’ll want to keep those statements forever or until the home or business is sold.
Credit Card Statements
Make sure you keep the receipt for anything you purchase with a credit card until the statement arrived. Once you have the statement, you can get rid of any receipts that aren’t needed to prove a tax-related purchase. Statements that show a tax-related purchase should be kept for seven years – the IRS typically does not go back more than six years for an audit (although that’s not to say they never do). Statements that don’t show any tax-related purchases can be discarded after 60 days. Although the IRS has ruled credit card statements to be insufficient for documentation of your tax-relevant financial purchases by themselves, they can be used in conjunction with your saved receipts. Often when the IRS needs you to substantiate a purchase you will need both the receipt and a proof of payment (i.e. a cancelled check or a credit card statement).
Hold on to any receipts that are business or home related as you’ll need those come tax time. Keep holding onto those receipts for seven years. All other receipts can be shredded once you receive your bank and credit card statements and confirm that they are correct.
Tax returns, like your tax-related receipts, should be kept for seven years, although it’s not a bad idea to keep them permanently either. The IRS typically goes back three years in an audit, but for substantial errors they will go back up to six. And in the case of a tax return that was never filed, the IRS has no limit on how far they can go back.
Keeping Your Financial Records Organized
Now that you have an idea of what to keep and for how long, you’ll want to keep them organized. There’s no point in going through the effort of saving your documents if you can never find them again.
For helpful organizational tips and tricks, we recommend checking out our blog on “How to Organize Your Financial Records”.