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ON THE MONEY: How long should you keep financial records?

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Greg Roberts

Greg Roberts

Every year about this time, my dear wife is in the process of gathering all of our tax-related documentation, and she asks the same question each year: What financial information should I keep for the future?

One way to cut down on the paperwork that you should retain for more than one year is to transfer all of those records to a flash drive. I just purchased a 32 GB flash drive online for $9. Generally a copy of your tax return that has been electronically filed can be saved in PDF format. If you prepare you own taxes using TurboTax or some other software, you have the option of saving your return in that PDF format.

Then, you can simply copy that PDF onto your flash drive, and voila, you have a digital record that can be stored in your safe deposit box or other secure location.

Here is an overview of how long you should keep certain financial records:

Income tax records: Generally, you should keep your personal tax returns for three years, since the IRS has three years from your filing date to audit your return if there is a suspicion of good faith errors. This three-year rule also applies if you discover a mistake in one of your old returns and decide to file an amended return to claim a refund. So the bottom line is to save all of your records that substantiate deductions, such as receipts, canceled checks, charitable contributions, mortgage interest, and others, for at least three years. The IRS has six years to audit your return if it is of the opinion that you underreported your gross income by 25% or more. Remember if you underreport your income, you could go to federal prison.

IRA contributions: You should retain documentation of your Roth IRA contributions permanently, so that you can prove that you already paid tax on this money when the time comes to withdraw monies from this account. Each year you should receive a form 5498 from your IRA sponsor or trustee, setting forth the contribution that you made to that traditional IRA or Roth IRA.

Retirement plan contributions: Keep the quarterly statements from your plan until you receive the annual statement. If everything matches up, then you can shred your quarterlies, but be sure to retain your annual statements until you retire.

Bank records: Go through your checks annually and keep those related to taxes, business expenses, home improvements and mortgage payments. Shred the rest.

Brokerage statements: Keep these until you sell the securities. You will need the purchase record from your individual stock purchases or mutual funds to prove whether you have capital gains or losses at tax time. When you receive a form 1099-B from the brokerage firm, make sure that their reporting matches your monthly statements.

Bills: When you have a copy of the canceled check or online documentation that a bill has been paid, you can shred the bill. However, for your really big purchases such as appliances, jewelry, rugs, antiques, furniture and PCs, be sure to retain your purchase receipt so that you can prove value in the event of loss or damage.

Credit card receipts and statements: For tax-related expenses, keep these for seven years. For other purchases, keep your original receipts until you match them up with your monthly card statement, then you can shred those receipts.

Paycheck stub or income statement: Keep these until you receive your W-2, and if everything matches, you should shred them. If they don’t match, ask for a corrected form, known as a W-2c.

House or condo records: Keep permanently everything pertaining to your purchase price or home improvements. Keep records of the expenses of buying or selling the property, such as legal fees and the realtor’s commission for six years after you sell the property. Retaining these records is important because any improvements you make in your house, as well as the expenses of selling it, are added to the cost basis, and reduces your taxable gain when you sell the property.

Medical bills: You should retain these until they have been paid; then save your proof of payment for at least one year. You will need these bills to document any medical expenses that you claim on your income tax returns, so if your medical expenses qualified you for a deduction, save that documentation for three years.

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