How long should I keep financial documents?

This post comes from Jim Wang at partner blog Bargaineering.

We recently purchased a sheet-fed scanner, a Fujitsu ScanSnap S300, to help organize our financial records. This purchase is easily one of the top 10 I’ve made in my adult life. We went from having a few banker’s boxes of documents down to just a few documents in about a week.

Using a sheet-fed scanner, versus a flat-bed scanner like a copier, saves you a ridiculous amount of time, and the ScanSnap will save your document into a .pdf file. It’s a bit pricey but definitely worth it if you’re looking to save things electronically.

One of the benefits of storing documents electronically is that it makes the “how long should I keep financial documents?” question a bit obsolete. Data storage is cheap so you can save documents forever, but I think it’s still important to know how long to keep documents because it gives you a better understanding of finances. For instance, knowing why you should keep tax records for seven years gives you a better understanding of the tax process.

So, how long should you keep financial documents? It depends.

The following documents are separated by the time you need to keep them, excluding obvious “keep forever” documents like life insurance policies (shred when they expire) and estate planning records (I suppose someone can shred these when you expire).

Keep for a year or less:

• Bank statements. Review when you receive them for unauthorized purchases, and keep the most recent one.
• Retirement/401k plan statements. Keep the most recent annual summary and most recent quarterly summary. Make sure they match what’s in your account and dispose of old statements.
• Monthly bills. Review for accuracy, but there’s no need to keep them (you might want to keep them for other reasons, like comparing year-over-year usage if your utility doesn’t provide that information).
• Credit card bills. Review for any billing errors, then shred them (or opt for electronic delivery and save them to a directory forever). Credit card companies have all of your statements online anyway.
• Paycheck stubs. One year. Keep them and compare them against your W-2. If it doesn’t match, go to your employer and request a change to your W-2. Otherwise, you can shred the paystubs (your W-2 is good enough).
• Insurance policies. Keep the most recent one. The older policies no longer apply so you won’t need them.

Keep for seven years:

• You’ll want to keep taxes for seven years. You have three years to file an amended return if you think you’re due a larger refund, and the IRS has three years to audit you if they think you made a mistake. The IRS has six years to audit you if they think you under-reported income, and there is no time limit if they think you filed a fraudulent return.

If you’ve lost old tax returns and would feel better if you had a copy, you can request a copy of past tax returns from the IRS. You can get a tax return transcript for free in about two weeks by calling (800) 829-1040 or order it by mail using Form 4506T (.pdf file). The transcript contains almost everything from your Form 1040/1040A/1040EZ.

• Quiz: Should you do your own taxes?

Keep forever or indefinitely:

• IRA contributions. Indefinitely. If you made a nondeductible contribution to a traditional IRA, keep documentation forever because it’s your proof that you made a contribution and already paid taxes on it.
• Brokerage statements. Keep statements that record purchases until you sell the security, to document any gains or losses.
• Loan documents. Keep these for the life of the loan and destroy once you’ve paid it off and have title in possession.
• Home records. Keep all bills for improvements until you sell (and then for seven years after, since they become tax documents) because improvements increase the cost basis of your home. You’ll also want to keep all the other expenses related to a sale (agent fees, lawyer, etc.).
• Receipts. Keep anything documenting a major purchase or improvements for insurance purposes (including 90-day purchase protection from credit cards). Otherwise discard.
• Savings bonds. Do yourself a favor and convert any paper bonds you have into electronic bonds at TreasuryDirect.gov. Otherwise, keep these for the life of the bond.

Always opt for electronic statements

If given a choice, always opt for electronic or paperless statements. This helps the environment (no mailing, no paper) and it saves you a lot of time. You don’t need to scan a statement if it already comes in .pdf form, so save the Earth, save yourself some time, and opt for electronic statements. You can keep these statements around forever, because you actually never know when you might need the information.

• Bing: How to keep your computer safe

If you do opt for electronic statements, download them. If you have a copy, you never need to rely on the data storage practices (or lack thereof) of the bank, credit card, lender, broker, whatever. If you close your account, they won’t keep your records. If a bank fails, they will have records but you won’t have access to them (see this harrowing tale from FatWallet), making everything just a little bit harder. So if you do opt for electronic statements, remember to download them.

Did I miss an important document? I’m not yet 30 so there may be documents I’m simply not aware of.

Related reading at Bargaineering:

• Top online banks
• Tax audit red flags
• What are mortgage accelerator programs?