PCS: Keep, Shred or Toss?
Whether you’re motivated by an upcoming PCS or it’s simply time for a little spring cleaning, the occasional purge of unwanted household items can feel like a fresh start. When you’re done cleaning out the closets, remember that same sense of accomplishment can be had when it’s time to tidy up your financial documents.
If you’re setting out to “Marie Kondo” the piles of paperwork in your file cabinet and all that snail mail stacking up on your kitchen counter, the classic KonMari question – “does this bring me joy?” -- won’t necessarily apply to your financial and tax paperwork. (Even as a financial planner, taxes never bring me joy.)
How long do I need to keep my tax records? Do I really need 10 years’ worth of utility bills? And what about all these canceled checks?
By following a few simple rules, you can tackle the piles of paper and send your financial documents off to the shredder with a little gratitude.
Keep forever. Important life documents, especially those that are difficult to replace, should be kept in a “forever” file, preferably in a fire safe box or similarly protected.
- Life documents: birth certificates, marriage certificates, death certificates, adoption papers, social security cards
- Military service documents: DD 214, VA disability certifications, and overseas deployment orders
- Education documents: diplomas, transcipts, certificates
Keep "permanently.” Key financial and legal documents should be protected in a similar way to your forever documents, but these documents might need to be updated or replaced over time.
- Estate planning documents: wills, powers of attorney, medical directives
- Legal filings: trusts, inheritance, court orders, contracts, etc
- Financial documents: mortgage/loan pay off documentation, life insurance documentation, etc.
- Investment documents: End of year statements serve as a historical record of all your contributions, distributions, and investment gains which could prove useful if you ever need to establish basis in an investment many years in the future
- Deeds & titles: deeds to property, titles of vehicles, certificates of authenticity, appraisals of artwork, antiques, jewelry, etc.
- Medical documents: your medical records, including your vaccination record
For estate planning reasons, it’s helpful to keep all the “forever” and “permanently” documents in a safe place like a fire safe box. It is also important to be sure your family members and executor know where to find them and how to access them if necessary. Estate planning documents like your will, medical directives, and powers of attorney should only be discarded when you update your estate plan.
Keep “almost permanently.” Documents related to the purchase, improvement or disposal of a home, property or business should be kept for at least three years, potentially seven years, after you dispose of the property.
Home ownership/rental properties: mortgage, title and tax documents including closing documents, loan pay off documents and any receipts for substantial improvements like additions or remodels that increase the value of the property should be kept for at least seven years after you sell or transfer the property.
Keep 7 years. The IRS can audit tax returns going back either 3 or 7 years, depending on their reason for the audit. That makes seven years the better safe than sorry choice for tax related documents.
- Tax returns including proof of your payment to the IRS and your state
- Important tax documents like your W2, 1099’s, 1098’s, etc
- Retirement contribution documents including your IRS Form 8606 if you have Traditional IRAs
- Supporting documents related to expenses written off including confirmation letters from charities you donated to, credit card statements and canceled checks. This includes health care receipts if deducted on your tax return
- Records for any business-related expenses including utilities, taxes, travel, purchases, etc.
Keep 1 year. Most monthly bills and bank/investment documents are accessible online, so there is little benefit to keeping them in paper form. If you prefer to keep them in your physical file cabinet, you need only keep them for one year. As mentioned earlier, end of year investment statements should be kept with your important documents.
Keep less than a year. Utility bills and other expense documents can be discarded once you’ve reviewed your bill for errors and paid the account. You only need to keep these longer if you write them off as a business expense or otherwise take a tax deduction for them (see Keep 7 years).
Shred or Toss?
Now that we know what to keep and for how long, let’s look at which documents need to be shredded instead of tossed in the garbage. In order to protect your identity from the teams of fraudsters out there, you should shred any document with your social security number, account number, or any other combination of personally identifiable information. When in doubt, shred it.
You can either do this with a home shredder or take your pile of documents to a local commercial shredder. Both the UPS Store and FedEx Store will shred your mountain of documents for a reasonable price, saving you the trouble of cleaning up the dusty mess yourself.
An ounce of prevention …
Now that you’ve tackled your collection of twenty-year-old canceled checks, it’s time to take this tidying up one step further – go paperless! Your banks, lenders, and investment companies offer a wide variety of paperless record keeping options. Simply log into your account and subscribe to their paperless option for monthly statements. At the end of the year, simply download a copy of the important annual documents for your records. Keeping important financial documents out of your mailbox is an important first step toward protecting your identity and simplifying your life.
Happy sorting:)
