We are often asked how long to keep financial records. To answer that question, let’s take a look at various types of documents:
Tax Returns: The IRS recommends keeping tax returns for three years. There is an exception to this rule. The IRS can go back six years in an audit when more than 25% of income was omitted from a tax return. Given the strong unlikeliness of this issue, especially for law abiding citizens concerned about keeping proper documentation, we think 3 years is sufficient. For clients working with a tax preparer, understand that CPAs keep copies of these tax returns as well, frequently for more than 3 years. If you need something from your tax return from five years ago, chances are your CPA has it. In addition, your CPA can send you a copy of your tax return in electronic format. Not only do you not need to keep a lifetime of tax returns, the three years’ worth of returns you need can be kept electronically.
With that said, a tax return and the supporting documentation that goes with it, contains a post-mortem of the important financial things that happened in any given year. We recall a conversation with a client whose father had passed away. They were put in charge of helping Mom with the family finances and the adult child found 40 years of tax returns that Dad had kept. It was both an interesting walk down memory lane for this adult child and his mom, as well as a learning experience to see how his parents managed their finances over the years. If you want to save one set of financial documents so your children can have the same experience, your annual tax return is the one to keep.
Brokerage Statements: Each month, you either receive financial statements in the mail or electronically. How long should you keep these statements? Our recommendation is to purge them immediately. Financial firms keep a minimum of 10 years of statements online for you to retrieve at any time; and they have the ability to retrieve electronic records beyond that period. If you have brokerage statements sitting in a filing cabinet or binder, do yourself a favor and take them to the shredder. You’ll never need to access the information in that statement from October 2003, much less 1972, and if you want it, the financial firms have that information electronically.
Insurance Policies: There is no statute of limitation on keeping insurance policies. If you lose the policy, the insurance company is still obligated to pay a claim. It does make sense to keep the actual policy in a safe place, both physically in a filing cabinet and electronically in our online website Vault. The key issue is making sure you and your loved ones know what policies you actually have and where they are stored.
Estate Documents: Having a signed copy of your estate documents, either in physical or electronic copy is critical. Be sure you and your family know exactly where these documents are, especially your Power of Attorney forms. These forms could be needed at a moment’s notice if you become ill or incapacitated. If you haven’t already, provide us with a copy of these documents to be uploaded to your secure Vault. That way, estate documents can be retrieved anywhere and at any time, so long as you have your login credentials. You never know when you’ll end up in the emergency room in the middle of the night and need these documents.
Conclusion: Saving a lifetime of data is both cumbersome and unnecessary. The electronic world has evolved over the last 30 years; and one of the key benefits is not having to keep records in physical form. Empty that filing cabinet at home and enjoy the freedom that comes with knowing you can access your historical data at any point if needed.