The U.S. financial services system is one of the most heavily regulated in the world.
Our federal and state governments have dozens of agencies that regulate and oversee financial markets and companies. The goal of regulation is to prevent and investigate fraud, help make markets efficient and transparent, and make sure investors are treated fairly and honestly.
As a consequence, financial services firms are required to provide certain information about investments, including performance histories, standardized fees, expense ratios, trade confirmations, IRS Form 1099 tax records, retirement plan information, and so on, on a regular basis. And no matter how digital you are, these financial documents can pile up in your home office, closet, or attic.
Many folks retain all this paper because they’re not sure what to keep and what to toss. Today’s article is intended to help you decide which to keep and which to round-file.
Why keep investment records in the first place?
The reason boils down to two inevitable and inescapable reasons: death and taxes.
Over the years, we’ve heard many stories of people passing away, leaving their spouses completely in the dark about their financial situation. Often, it’s because the deceased hadn’t taken the time to organize their estate planning and financial records, and stored them in a centralized, secured location that the spouse knew how to find.
The other important reason to keep sound investment records is to simplify the process of preparing your federal income tax returns and state returns. Unless all your money is tied up in a tax-deferred account such as a 401(k) or IRA, you must pay income taxes if your stocks pay dividends, your mutual funds make distributions, or you collect interest from bonds and cash-equivalent holdings. You must also pay capital gains taxes if you sell your investments for more than you paid for them (or elect to carry over capital losses), or if your mutual fund passes along profits it makes from selling investments to you as capital gains distributions.
The basic rule we follow is that any financial information or disclosure that does not have information specific to your account, such as a prospectus, statement of additional information, or mutual fund disclosure document, is probably something that you don’t need to keep on hand (almost any such document can be located online if you need it). Here are some of our other time-tested tips for dealing with financial information:
Toss out unnecessary financial documents
Most tax returns, bank statements, and receipts are not useful after seven years. If they are available online, you don’t need paper copies. File or scan only what you need for establishing your cost basis when selling an asset so that you claim the accurate cap gain or loss on your tax return. Toss the rest out securely by shredding or putting them in the burn pile.
Keep tax records for three to seven years
Record-keeping rules vary by supervising agency. Most require you to keep tax records for three years from the date you filed your original return. If you paid a medical expense with your health savings account (HSA) or flexible spending account (FSA), for example, you should keep the receipt for three years. However, for worthless securities and bad debts, you should keep your documents for seven years, according to the IRS. Of course, if you get a tax filing extension, serve in combat, qualify for disaster-relief deadline postponement, or have a financial disability, you may need to extend your document holding period. If you claim the income, a deduction, or a tax credit that appears on a return, you must keep receipts, canceled\ checks, or other proof that you received such income or qualify for a deduction, but you don’t need original documents. The IRS will accept a legible digital copy of the original.
What to toss after a year — or sooner
Your credit card or mutual fund company will provide you with a year-end statement that categorizes all transactions in those accounts. You can shred the monthly statements after you’ve confirmed your purchases and captured the relevant financial data for taxes. And if you’re getting paper statements, stop. Sign up for e-delivery. In addition, there’s no need to keep all those ATM or retail receipts. Once you get your statements, you can shred and toss them.
Organize the paper or scanned documents you need to keep
Keeping versions of your tax returns for longer than seven years may be a good idea if you haven’t already signed up for an online IRS account. Past returns contain your financial history of employment, investments, and charitable giving, and can be very helpful if you need to verify payments made into Social Security.
If you’re using a file cabinet, organize your files chronologically, so you can find them easily (make sure your file cabinet is in a secure spot that you or loved ones can get to quickly). If you scan documents, be sure to name them appropriately and include the year.
Leave cookie crumbs
We’re big believers in having a single checklist or spreadsheet that tells your spouse or executor how to locate the following:
- Most current will and last testament
- Power of attorney and living will
- Trust documents
- Financial statements (retirement, brokerage, mortgage, home equity, etc., with account
- numbers)
- Copies of your 401(k) plan and IRA documents, so your beneficiaries can determine how to
- take distributions from your account
- Tax returns
- Deeds
- Insurance contracts (Term life, whole life, annuities)
- Contact information for all your financial advisers (and logins from all your financial account
websites)
Keep this list in a safety deposit box or encrypted file on your hard drive that is regularly backed up — and make sure your loved ones know how to access it.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.