Here’s a topic that is tangential to my normal postings, but I figured since I did the research, I’d share what I found. Note: I”m not an expert in this area. This simply documents my findings. Please followup with other sources before implementing your own record retention system.
It’s tax time in the US and every year when I pull together our tax information for preparing our tax forms, I look at the cache of old records and make a pact to actually shed the really old stuff. I have records that pre-date the personal printing press (AKA printer) in our house. It’s scary! Come on, what value are tax receipts from 10 years ago or a bank statement from even 5 years ago … NONE. However, when it comes time to actually remove it, I hesitate and put it off until next tax season.
This year, I’m tackling it. However, before do so, I needed to find document retention guidelines so that I don’t make a mistake and remove documents that could still be needed. To start, I went to the IRS website as they are both the authoritative site for Federal tax information and they do provide significant documentation on tax requirements. What I was searching for was guidance for how long to save copies of (a) tax returns and (b) supporting documentation. So, I found this. Not clear, but unless someone is purposely filing bogus returns or not filing, the max seems to be around 4-6 years. Other sites recommend 7 years, which given the IRS’ requirements seem to be a nice, safe retention period. BTW: Some sites recommend keeping copies of the returns permanently, but the supporting documentation for 7 years. Since the IRS will provide your return upon request, it’s not clear to me that we need need to retain all returns forever.
One area of concern: How long to retain documentation about the cost-basis for various assets like real estate or securities. For real estate, once you sell the property and incorporate that sale (and subsequent purchase of a new primary residence) into your tax return, then it seems that the same retention period remains: 7 years. For financial instruments like stocks and bonds, document retention has become a lot easier, with the advent of on-line access to documentation and better (and more straightforward) record keeping by your broker or fund provider. Major brokerage houses maintain this documentation for 10 years on-line, which seems to be more than sufficient. You’ll need to see what your broker or fund provider guarantees for record retention. Again, you’ll need it to provide cost-basis information when you sell the security, then keep that documentation with your tax return for 7 years.
Finally. what about non-tax records? Starting with bank statements and cancelled checks. This is another area where I’ve been keeping old records for a long time. However, when do you really need bank statements? Usually, the only time is when you apply for a loan or mortgage. In this case, they are looking for only 3 months of statements. You probably want to keep cancelled checks (or facsimiles) around for more than 3 month, but when was the last time you needed a cancelled check from several years ago? If your bank keeps records on-line, then you’re golden. Bank of America keeps records on-line for 18 months, with a mechanism for ordering older records. Most larger banks have similar policies. I’ve been keeping electronic copies of our bank records for a few years now, so we don’t need to store any hard copies. I think a nice, safe number would be 3 years on bank records, which is in-line with recommendations.
For medical and home insurance documentation, the rule-of-thumb seems to be 5 years. There is some dispute about what to keep. Many sites say to destroy the policy once the new one goes into effect. However, if you’re planning to submit a claim while the older policy was in effect, then you should keep it. This is an area where keeping soft copies can be very convenient.
For other documentation, keep them around for only as long as needed and leverage on-line access if possible. For example, keeping pay stubs lying around is dangerous given the amount of personal data contained within. If you have a method to retrieve them on-line, just print off a copy when needed. If not, then you likely only need to retain the 2 latest stubs, since they will be required for a mortgage or loan application. I’d also keep any stubs you will need for estimating next year’s taxes.
Again, I’m simply providing my findings. See the following for more information when implementing your own retention strategy:
- IRS retention requirements and for more detail, IRS’ document 552.
- Shred Nations Personal Record Retention Guidelines
- Bankrate.com retention guidelines — Note that this is a more conservative list. However, when you look more carefully, the two areas where they recommend long retention times involve taxes and cost-basis information, which lines up with the above.
- From the Arizona CPA firm Henry and Horne, their Record Retention Guidelines — This is also a more conservative list.
Now, to start shredding ……………..