How Long to Keep Financial Records? Here’s a Quick Guide

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Financial records

Ever wondered how long to keep financial records? Or how long to keep bank statements? What records would be unnecessary clutter? Which records would become most important in the event of errors caused by others?  What should you save and what should you shred?

Well here's a quick guide on how long to keep your different kinds of financial records. Keep in mind that if you don't feel comfortable throwing something out, you should definitely keep it!

Financial records to keep permanently / forever

There are financial documents that you will need to keep forever “just in case” they are needed. These are important documents, and there are varied reasons why you could need them. However, some others you might rarely need.

Good record-keeping regardless of usage is still of utmost importance. It’s also important to tell your loved ones where you keep these documents in case you are incapacitated or precede them in death.

These documents need to be kept in a safe place, preferably a fireproof safe or safe deposit box. There are cheaper options such as fireproof/waterproof envelopes. However, the effectiveness of these methods is not as strong as having a fireproof safe.

Some records that need to be kept forever, “just in case,” are some of the most important documents.

Forever records 

  • Birth certificates / Adoption paperwork: Usually needed for jobs, enrolling in school, obtaining driver’s license, benefits, insurance additions, etc.
  • Death Certificates: Usually needed for closing, canceling, and transferring accounts. Also needed to fulfill life insurance policies, pensions, death benefits, etc.
  • Marriage Certificates: Usually needed for the Social Security Administration status and/or name change, driver license name change, mortgage loans, life insurance, health insurance, etc.
  • Wills: This is necessary upon death for the designation of properties, rights, and the deceased person’s requests. Keeping records also assists when there may be errors within the filing system at a registrar such as the clerk of court, or even the lack of filing altogether.
  • Records of paid off mortgages on housing, land, and other property: Deeds of trusts, promissory notes, and satisfaction notes could become extremely important documents. Especially in the event of clerical errors from either the mortgage lending office, attorney’s office, or county registrar's office, during the transfer or sale of a home or property.
  • IRA contribution statements for non-deductible contributions to prove that you paid taxes: To avoid tax implications due to errors or misfiling.

Importance of keeping these records

These documents are important to keep since they provide proof of specific events occurring or when property exchanges occur.

Most of these documents are also filed in the register or recorder of deeds office within the county the property is located or where the event occurred. Keeping these records is vital especially when there were errors in filing or no records were filed at all.

The documents that you need to file with the local registrar may also be available online. Some, such as vital records, may only be available to be requested in person from an authorized individual.

Financial records to keep for things that are active

If you have active contracts, loans, or other financial obligations/contributions that are active, you want to keep those records indefinitely.

Examples include:

  • Insurance documents
  • Contracts
  • Retirement plan contributions
  • Equity/stock records
  • Brokerage statements
  • Home improvement records
  • Property tax records
  • Ongoing debt repayments
  • Records for items associated with active warranties
  • Records for items that have not exceeded their return dates

These are documents to keep just in case they are needed at any time. You never know when there could be issues several years from now and you may need these documents.

There have been instances where property issues weren’t discovered until decades later. So it’s important to keep these documents indefinitely.

How long to keep tax returns and documents?

For certain records, after 7 years it is no longer necessary to keep them. Especially for things like debts that are paid off. This is because 7 years is typically the time frame allowable for those items to be challenged.
You can however keep them longer if you choose. These record types include:

  • Tax returns
  • Tax-related records e.g. alimony payments, charitable contributions, etc

It's also important to keep the below guidelines from the IRS in mind as it relates to your tax returns:

  • Tax refunds or credits: Keep records for 3 years from the date you filed your original return. Or 2 years from the date you paid the tax. Whichever is later if you file a claim for credit or refund after you file your return.
  • Loss claims: Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
  • Unreported income: Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
  • No tax return filed: Keep records indefinitely if you do not file a return.
  • Fraudulent reports: Keep records indefinitely if you file a fraudulent return report.
  • Employment tax records: Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Financial records to keep at least 3 years

There are some documents that you can keep for a shorter amount of time but are still considered pertinent to keep.  Many of these documents should be kept for three years to provide proof of payment, resolve, or prior claims service.

  • Canceled insurance policies
  • Records of property sales e.g. investments and real estates
  • Paid medical bills (from the final payment of specified treatment)
  • Any documentation that you need for capital gains tax or to support deductions on your tax returns.

Any active/open claims under former policies should be kept three years from the date the claim is resolved.

How long to keep bank statements?

Bank statements fall under the category of financial documents to keep at least a year. Essentially, your bank statements show a record of your financial transactions and you want to keep them at least a year.

These types of documents are typically the more common occurring documents you may have. They are also important to have if you need to dispute a transaction or prove payment or resolve.

Other statement documents you should keep also include:

  • Canceled checks
  • Paycheck records
  • Bill payment records

Note: If any of these documents are a requirement for tax deductions, you will need to keep them longer - see above.

Many companies now offer electronic paycheck records, online bill pay services, and online banking.  If you utilize these services and save documents with sensitive data, it is important to encrypt the device and/or the files saved.

It is also important to use common safety measures. For instance, using a device or computer that has updated malware protection, changing your password often, and refraining from using devices you don't trust.

How long to keep business records?

There are different rules for record retention for your business. Since most businesses have more moving parts and deal with more than just the owner, there will be more records. Also, most business record retention requirements are more stringent.

Some records deal with the business, some deal with the customers, some deal with the employees, and some deal with the Internal Revenue Service.

Below are some of the records that businesses need to keep and suggested the amount of time to keep them:

  • Income taxes: 6 years, 7, if there are any deductions for debt loss or bad checks.
  • Employee payment/tax records: 4 years after said taxes have been paid or are to be paid.
  • Workers Compensation records: 10 years.
  • Business operational costs and expenses: Most of these expenses are considered supportive documentation for tax purposes. Anything considered supportive documentation should be kept for 3 years unless it falls under other IRS guidelines. Documents associated with insurance policy coverage that may require proof of purchase/cost, etc should be kept longer if the insurance company requires. Any documentation associated with warranties should be kept until coverage expires if it is beyond 3 years.
  • Business bank statements: 7 years. It's a good idea to keep a detailed yearly record to minimize the paperwork associated with monthly statements.

Note: If you use anything for tax purposes, the guidelines for the IRS will apply. See above or the official IRS website.

Key IRS points on financial record keeping

The IRS specifically mentions two points, for both businesses and individuals. Hopefully, you don't have a requirement to do them:

  • Keep records for 6 years if you do not report income that you should report, and this unreported income is more than 25% of the gross income shown on your return.
  • Didn't file a tax return? Keep records indefinitely if you do not file a return.
  • Were you the victim of tax fraud? Keep records indefinitely if you file a fraudulent return report.

Many companies now use technology for some financial services and or billing. It is important to make sure when you do utilize these services for financial, billing, and/or storing potentially confidential and personal data, you use trusted and secure technology to prevent identity theft and fraud.

It is not uncommon to get advice that you should save everything for your business.  If you have the luxury of unlimited space, physical or digital, and are great with organization, this is always an option as well.

As mentioned earlier, if you feel uneasy about getting rid of something, keep it.

So where should you keep your financial records?

The most secure way is to scan and encrypt your records which you can store locally on a hard drive with an encrypted cloud backup.

If you like the idea of digital records without setting up the technology yourself, select banks now offer virtual safety deposit boxes. They allow you to securely upload documents, many of them free if it remains under a certain storage size.

If you are uncomfortable with digital copies, then you can keep paper copies securely in a locked safe. Make sure that it is both fire and waterproof or you can put them in a safety deposit box in a vault at your bank.

Our favorite safes include:

  • The Fireproof lockbox from SentrySafe. It features a flat key lock to prevent the lid from opening in the event of a fire and includes two keys. The safe accommodates letter-size hanging files (purchased separately) for easy storage of passports, social security cards, and birth certificates.

Sentrysafe fireproof lockbox

  • The AmazonBasics Security Safe. This compact safe offers a 0.5-cubic-foot capacity. It nicely accommodates a wide range of items, including legal and financial documents, passports, jewelry, cash, and more.Amazon essentials safe

 

One key thing to note is that that a living will and any other document that is usually needed in an emergency or within a short time frame should not be secured in a safety deposit box. For example, documents containing one's funeral wishes. This is because accessing them is usually limited to banking hours. And they are typically only accessible only to authorized individuals.

What records should you shred?

When it comes to what specific records you should shred, here's a list to keep in mind:

  1. Credit card offers in the mail. So no one else applies for credit in your name.
  2. Canceled or voided checks. These checks have your account number and routing information on them.
  3. Expired credit cards. The magnetic strip still has encoded information on it.
  4. Old pay stubs. You can always request this from your employer.

Keep in mind that, if you choose no longer to keep a financial or personal record, it's a good idea to shred it to protect yourself from identity theft. To shred documents at home, you can purchase an inexpensive cross-cut paper and credit card shredder like this one below from Amazon.

cross-cut paper and credit card shredder

 

The right financial record keeping can save you a ton of stress

The right financial record keeping ensures that you are aware of your big financial picture. And very importantly, when you are aware of all your records, you can protect yourself from and quickly identify any identity theft.

Make sure that if you ever become incapacitated, the people in your life who would need these documents know where to find them. It’s important to make sure that whoever would need to pay the bills and find these types of documents can access them easily.

Don’t forget, if you are unsure if you should keep something, keep it. It's better to keep it and not need it than to need it but have thrown it out.

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