How Long Should You Keep Financial Records? Here’s A Quick Guide

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Financial records

Ever wondered how long exactly you should be keeping your financial records? 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.

Note: It's important to 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.

Keep in mind that, 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 also cheaper options such as fireproof/waterproof envelopes; however, the effectiveness of this method is not as strong as the previously listed options.

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

  • 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, 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 in the event of clerical errors from either the mortgage lending office, attorney’s office, or county registrar's office, especially 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 property exchanges occurring.

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. Continuing to keep these records becomes vital when there were errors in filing or lack of filing altogether.

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 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 paid off debts because 7 years is typically the time frame allowable for those items to be challenged.
You can 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 these guidelines from the IRS in mind as it related 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?

Financial documents to keep at least a year are typically the more common occurring documents you may have and will be important must you dispute a transaction or prove payment or resolve.

  • Canceled checks
  • Paycheck records
  • Bill payment records
  • Bank statements

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 such as using a device or computer that has updated malware protection, changing your password often, and refraining from the use of open-sourced internet.

 

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, and most record retention requirements are more stringent.  Some records dealing with the business, some dealing with the customers, some dealing with the employees, and some dealing with the Internal Revenue Service. There may be involvement with other organizations or persons as well.

Some of the records/documentation that businesses need to keep and the specified amount of time, or suggest the amount of time:

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.

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 individual. 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.

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.

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The right financial record keeping can save you a ton of stress looking for documents.

It also 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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