Presented by Robert Blakely CFP®, AIF®, ChFC
Living in an increasingly paperless world has its benefits, but does it make a difference when it comes to records retention? Sure, digital recordkeeping on the cloud means more storage space, easy access, and less vulnerability to inadvertent destruction. But the questions of what to keep and how long feel just as confusing as ever.
Keep or Toss. Whether your files are physical or electronic, the same principles and time frames for record retention apply. Below, we review some rules of thumb to consider for a few common financial documents. Keep in mind, though, that this list is not exhaustive, and professional responsibilities and potential liability risks may vary.
ATM receipts, deposit slips, and credit card receipts. In general, you don’t need to hold onto monthly financial statements after you verify your transactions—that is, unless statements include tax-related information. Also, keep in mind that if you dispute a transaction included in a statement, you have 60 days from the statement date in most cases. Beyond 60 days, not initiating a dispute may alleviate the bank of liability associated with the charge—so you may be on your own to try to get your money back.
Paycheck stubs. Once you receive your annual W-2, it’s usually unnecessary to retain your paystubs for the prior year. However, you may want to keep your year-end stub if it includes any tax-related information not reported on your W-2. Additionally, if you anticipate a life event soon that will require proof of recent income—applying for a home loan, for example—then plan to hang onto pay stubs from at least the past two months.
Tax returns. Determining when to purge tax returns usually depends on how long the IRS has to contest a given year’s return. In most cases, it’s a period of three years—assuming tax returns are filed properly and do not contain any knowingly fraudulent information. However, the time frame can extend up to six years for severely underreported income, and there’s no time limit for the IRS to contest fraudulent returns. The same timing applies to the supporting documentation in preparing a tax return. Therefore, you should also retain the financial and tax documentation—investment statements showing gains or losses and evidence of charitable contributions, for example—pertinent to the corresponding year’s return. If you’re unsure how long you should keep a specific tax return and accompanying paperwork, check with your accountant. Additionally, the IRS offers useful information on time limitations that apply to retaining tax returns.
Old 401(k) statements. Once you’ve confirmed your contributions are recorded accurately, there’s little need to keep each quarterly or monthly statement. However, it may be a good idea to keep each annual summary until the account is no longer active.
Estate planning documents. Although there’s usually no distinction about whether records need to be retained in paper or digital form, there are certain instances where it’s essential to have original legal documentation with the “wet” signature. This requirement holds for estate planning documents. For example, a court will only accept a decedent’s original last will and testament in most circumstances—a copy will not suffice. If you’re unable to produce the original, the court may presume it doesn’t exist, deeming the copy invalid. There may be legal avenues you can pursue to get the court to accept a photocopy of a will, but this could prove to be a costly and stressful process.
Get Organized and Be Sure to Shred. A good records-filing system is a key to helping you maintain and easily access important documents. If you’re storing things digitally, you can retain much more than any filing cabinet could hold, making it easy to take a more liberal approach to what you save. Keep in mind that the retention guidelines for many documents aren’t clear-cut. When you’re unsure, start by assessing what purpose the document may serve in the future. And it’s always important to consult the appropriate financial, tax, or legal professional for advice on specific records. Finally, remember that when it comes to materials that include personal information, you should be shredding it if you’re not keeping it.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Blakely Financial, Inc. is located at 1022 Hutton Lane Suite 109 High Point, NC 27262, and can be reached at 336.885.2530.
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