3/11/2011 12:10 PM ET|
How to purge your financial clutter
You don't really need to keep those towering piles of paper records. Here are tips on what you should throw out and how to organize what you should keep.
You may not be ready to go entirely paperless, but chances are good you're hanging on to a lot more dead trees than you should.
Now is a great time to remedy that. After you've filed your tax return, you can get serious about reducing your financial clutter -- now and in the future.
Here's what you need to know:
There's nothing special about scraps of paper. The Internal Revenue Service accepts electronic records, so you can scan receipts and download documents rather than hanging on to the paper versions. Often, you don't even need to download, now that many financial institutions offer quick access to statements online. My bank, for example, gives free online access to my statements for the past seven years. My credit card issuers offer the same for six to seven years, while my brokerage offers free access for 10 years. Check with your institutions to see about their policies.
"Seven" is a magic number. That's how long the IRS typically has to audit your tax return. Your biggest risk is in the first three years after a return is due; the 2010 return that's due this April can be audited under normal circumstances until April 2014. The IRS can extend that deadline by three years, to April 2017, if it suspects you underreported your income by 25% or more. There's no deadline if you committed fraud or failed to file a return, but we'll assume you're not a crook and have stayed up-to-date. If you write off a bad debt or claim a tax break for worthless securities, you need to keep proof for seven years after filing -- or until April 2018, for your 2010 return.
You should keep some stuff longer.
Though you can shred supporting documents for your tax returns after the danger of audit has passed, many tax experts suggest retaining your actual tax returns indefinitely in case you or your heirs need access to the information they contain. Whether you keep scans or the actual paperwork is up to you. Also:
- Documents that pertain to an asset you own outside a retirement fund -- confirmations showing the purchase price of a stock, for example, or improvements on a house -- should be kept for as long as you own the asset, plus seven years.
- W-2 forms should be kept until you start drawing Social Security.
- Three tax forms relating to retirement accounts should be kept until those accounts are drained. Those include Form 8606, which helps you calculate your tax basis for future retirement-plan withdrawals; Form 5498, which shows individual retirement account and Roth IRA contributions; and Form 1099-R, which shows IRA withdrawals.
- For all loans, including mortgages, you can ditch monthly or quarterly statements once you get the year-end summaries, and you can destroy the year-end summaries when you've paid off the loans. However, you should keep indefinitely the final notice showing a loan has been paid off in case a disorganized lender or unscrupulous collector pretends the debt hasn't been paid and tries to dun you.
- For insurance purposes, keep receipts and appraisals for big purchases as long as you own the items.
- Certain documents -- including birth, marriage and death certificates, divorce papers and military discharge papers -- should be kept for life.
Have good backups. Even if you insist on clinging to paper, you should consider scanning and storing copies of essential documents off-site in case your home is destroyed. You can back up important files to CDs, thumb drives or external hard drives and leave them in a safe-deposit box or with an out-of-state relative, or use online services such as Mozy or Carbonite to store your data in the cloud.
'Good enough' organizing
Now, I'm a big fan of "good enough" organizing. You could go berserk scanning and backing up all of your old documents, but for my money it makes more sense to scan just the items noted under No. 3, above, and then start digitizing your files going forward.
Instead of scanning every last document in your files, expend your energy purging those files. Get yourself a good cross-cut shredder that can handle a dozen or more pages at once, and stuff it with:
- ATM and bank deposit receipts. Toss them after you reconcile them with your bank statements.
- Credit card receipts. Once a purchase shows up on your credit card statement, you can ditch the slip -- unless you need it for tax purposes, in which case you can scan it and keep it with that year's tax records.
- Pay stubs. Shred them once you get your year-end summary.
- Receipts for minor purchases. After three months, the chances of you returning the item are slim. I have three folders labeled "this month," "last month" and "two months ago." New receipts are dropped into the "this month" folder. Each month I transfer the receipts to the next folder and dump the ones in the "two months ago" file. (I got this receipt-organizing tip from organizer Debbie Stanley's terrific book, "Organize Your Personal Finances in No Time.")
- Utility bills. If you aren't writing off a home office -- and thus a portion of your utilities -- there's not much reason to hang on to last month's bill, let alone anything before that.
- Phone and Internet bills. If you deduct a portion of these as a business expense, scan and keep them with that year's tax records. Otherwise, ditch them.
- Old insurance claims. If the claim was paid, you can shred it after a year. If you wrote off medical costs or a casualty loss on your taxes, however, keep the information with that year's tax records.
- Social Security statements. When you get a new one, ditch the old one.
- Workplace retirement-plan statements. Keep the year-end statements for your 401k or 403b and trash the rest.
- Traditional pension information. If you're lucky enough to have a traditional, defined-benefit pension, hang on to any correspondence you get about it. Employers do go out of business, and the information you receive could help you track down a much-needed benefit when you retire.
- The dumb stuff. You know what I mean. Expired warranties. Owners manuals for appliances you no longer own. Repair receipts for the car you sold three years ago. Policies from the insurer you've since replaced.
Dry up the paper flood
Finally, think about ways to let less paper into your life, so you won't have to deal with so much of it next year. Those ways can include:
- Paperless billing and statements. If you need a bill for tax purposes, you can download it. You can typically access financial statements online for several years, which is as long as you're likely to need them.
- Automatic payments. You can have a trusted biller take the money directly from your checking account, or have the bills charged to a credit card you pay off in full each month.
- A system to deal with receipts. Even those of us who have gone mostly paperless are plagued with little paper slips from various transactions. Sort through your wallet regularly to separate out any tax-related receipts and those related to expenses your employer will reimburse. Scan and file those as you go, then consider using the three-folder system I describe above to deal with the rest.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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Our everyday stuff, mail, ect gets put in a basket and shredded at the end of the month.
If you want a really secure way to get rid of your paperwork, shred, separate into three different bags and give to your local animal shelter. Who whats to go through something that's been peed on.
I am a PackRat. I saved all my pay stubs, timecards, tax papers, school receipts, class studies, transactions, returned checks, and anything else with my name on it,...boxes full, for ten years. I also continued the practice, during my marriage of 30 years. When it was rime to get divorced, my ex, being the rat that he is, claimed he gave me everything, including my degree I earned after 10 years of night classes after the day's full-time job (including overtime). My piles of receipts saved my bucket for whatever he brought up, so the judge said that I owe him nothing and refused his claim for alimony and reimbursement. I proved that I had more $ saved than he had on our wedding day. My Company paid for my education. I've been happily divorced for 20 years. Any woman looking for a husband, never had one. (Ladies, does that sound familiar?) Viva receipts! I kept them, "just in case." Do you think I can get rid of them now?
Thank you for getting it right about saving tax/earning records! Most financial advisors are advising the public wrong. Here is my advice regarding earnings records:
KEEP YOUR EARNINGS RECORDS FOREVER!
Eventually everyone will want to confirm their earnings records with data at Social Security. If there are errors and you do not have proof of earnings you will be simply outta luck. This also applies to both spouses!
Trust this advice... I worked for SSA for over 15 years and have had to reconcile my own earnings records. You just HAVE TO keep these records unless you are willing to be a victim of record keeping errors or the failure of long-past employers who failed to report your earnings to SSA. This is especially true for the early years where we may have held multiple jobs and jobs where the income swings widely as in sales or construction, etc. Earnings in the early years have the greatest multiple in computing benefits as they have been with Social Security for a longer time.
After further discussion with my girlfriend, a retired Claims Authorizer at SSA, I/we also suggest that if one is dissolving a marriage of 10 or more years each partner should have the earnings records of the other partner and be granted future access as part of the divorce settlement.
There is no telling what the future may hold and either partner may need to file for Social Security benefits under the Ex's or deceased spouse's record. (The filing of an Ex on the other partner's record does not diminish the other's benefits.)
This "Keep for 7 years" advice is wrong but is still spread by virtually all financial advisors.
This online scheme of cooperative burning would be the kitchen equivalent of open-software development, a growing<a href="http://www.smile2cloud.com/">programming</a> lobby group that promotes transparency, convenience, and collaboration. If traditional software development was a secret recipe, open development would be a community recipe book!
I agree. Purging all documents saves space in your home for the more important documents. For example, after seven years you can shred all tax related documents, as the Feds cannot come after you if seven years have to get your tax returns.
Same for all other documents; after seven years it is legally acceptable to shred documents.
So organize youself and get rid of anything that is seven years old; I mean everything. Don't be shy, it is your right. If you don't agree, contact your local representive and ask them. They will probably agree with you. So shred everything that is seven years old and save the space for the important stuff.
Ha ha. shred whatever you want! The Feds can audit you anytime and its all about the dollar. If you can afford to pay the piper you dont have to keep any records at all.
This bull about 7 years yada yada yarp is hogwash. Get audited once and you will find out! LOL
The information in this article is already very dated!
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