How Long to Keep Financial Documents: A Simple Guide

Managing financial documents can feel overwhelming, especially when deciding what to keep and what to discard. This guide provides detailed information on how long to keep financial documents and offers practical tips for storing or safely disposing of them.

Tax Document Retention: How Long Should You Keep Tax Returns?

IRS Guidelines for Tax Document Retention

First, how long should you keep those tax returns and supporting documents – such as W-2s and 1099s? The IRS recommends keeping them for three years. That’s because it generally has a three-year statute of limitations on conducting audits.

Exceptions to the Three-Year Rule

While the IRS typically advises keeping tax documents for three years, there are exceptions requiring longer retention. Here's a breakdown of when to keep your records beyond the standard period:

• Keep  4 Years :
  • If you maintain employment tax records, retain them for at least four years after the tax became due or was paid, whichever is later.
• Keep 6 Years:
  • If you underreported your income by 25% or more, the IRS can audit your returns for up to six years.
• Keep 7 Years :
  • If you filed a claim for a loss from worthless securities (e.g., stocks or bonds) or bad debt reduction, retain these records for seven years.
• Keep Indefinitely
  • If you purchased property, keep records to document the original purchase price.
  • If you did not file a tax return, retain all relevant tax documents indefinitely.

How to Keep or Dispose of Tax Documents

Clearing your home of piles of old paperwork feels great, but there’s a reason we recommend shredding instead of tossing them into the weekly garbage. It’s because most of the documents contain personal information you don’t want to have exposed to anyone willing to do a little dirty work to steal your identity.

Why Shredding Is Essential

Either invest in a shredder for your home or use a professional shredding service (for which you may have to pay a fee). Also, your community might provide free document shredding services a few times a year.

Storing Important Paper Documents

Many of your stored paper documents can be kept in a locked filing cabinet, but a home safe is usually a better option for the most important ones. Consider getting one that’s fireproof and waterproof, and that can be secured to the floor or wall so that thieves can’t easily walk out with it.

Not all bank branches still offer safe deposit boxes, but this can be an option if you want to keep documents offsite.

However, you’re at the mercy of the financial institution as to when you can access the box.

Digital Storage Options to Cut Down on Paper

If you want to cut down on paper, you have several digital storage options. Keeping all your documents on your computer isn’t very efficient. Better digital options include external hard drives or flash drives, but you might want to have multiple backups in case one is damaged.

Another option is cloud-based storage, which not only saves space but also can organize and keep documents secure through encrypted networks. Many providers allow access through mobile devices, making your documents accessible almost anywhere in the world.

Avoid Shredding Originals You May Need Later

If you do go digital, make sure you don’t need an original paper document in the future. The last thing you want is to shred something to save space, only to need it five years later.

Personal and Legal Documents

Personal documents include things like birth certificates, Social Security cards, marriage certificates and divorce decrees, adoption papers, death certificates, citizenship papers, military records, diplomas, health records and passports.

Legal documents include powers of attorney, legal filings, retirement and pension plan documents, prenuptual agreements, guardianship papers, medical directives, trust documents, wills, living wills and beneficiary forms.

You should keep these kinds of documents indefinitely. (If you have updated legal documents, you can shred the previous versions.) Retain the originals somewhere safe where your loved ones can access them if needed.

Property Records

Keep documents related to property purchases for as long as you own the property. This includes deeds, titles and receipts for home improvements. If the documents help you establish the cost basis for tax purposes, keep them for seven years after you sell it.

Keep records documenting repairs to property for at least as long as you own the property, as well. And keep warranty documentation while the warranty is still in effect, or until you no longer have the item, whichever happens first.

Insurance Policies

Keep your insurance policies for as long as they are active. This includes health, life, liability, home and auto insurance. It also includes annuity contracts. Once a policy is no longer active, you can dispose of it, but keep the final statement for your records.

You should also have an inventory of property (written and photographed or on video) for insurance purposes. Keep it until you update it.

Investment and Loan Records

Keep investment statements for seven years in case of an IRS audit. (Once you receive an end-of-year statement, you can shred the monthly or quarterly statements for that year.)

Keep records related to your purchase of an investment for several years after the investment is sold. This is especially important for tax purposes and in case of an audit, especially when calculating capital gains and losses.

Keep documentation on any investments you inherited – fair market value and information used to determine its cost basis – indefinitely. You’ll want to keep original investment certificates (Series II or E savings bonds, for example) indefinitely as well.

Keep loan statements and documents showing your most current balance on your car loan, student loan, personal loan and so on. Save the final statement, showing your balance is paid in full, for 7 years.

Bills, Receipts and Paystubs

According to credit monitor Experian, bank statements should be kept for at least seven years if you’ve used your statement to support information you’ve included in your tax return. Again, they may be needed for tax purposes, and they also help verify your account history and ensure there are no unauthorized transactions.

By the same logic, old checkbooks should be kept for at least 1 year/7 years with provisions. Checkbooks can help verify payments and resolve any financial disputes.

Household bills, such as utility or credit card bills, and receipts for minor purchases generally only need to be kept until you deal with them. Once you have verified that the bill is correct and the payment has been processed, you can dispose of them. However, there are two caveats: If you use them to support tax deductions, keep them with your tax return documents. And keep receipts for items that are still under warranty.

Pay stubs and medical bills should be kept for one year (again, assuming they’re not in dispute and you don’t need them for your tax filing.)