If you’re the type that likes to declutter, you may be tempted to toss tax-related documents once your returns have been filed. But before you head to the shredder, do you know which documents to keep and how long to keep them? There are clear guidelines for electronic and paper records.
Major documents and financial records (keep forever)
You should retain documents related to major life events forever. These include:
- Birth certificates
- Social security cards
- Passports
- Marriage licenses
- Divorce decrees
- Death certificates
- Estate planning documents – Attorneys generally keep copies of documents, but you should receive and retain the original signed documents.
- Life, disability, and long-term care insurance policies
- Loan documents – Keep all records while still repaying. After that, retain the letter from the lender indicating the debt is paid in full (preferably along with a few key documents).
- Property records – Include closing paperwork, home insurance policies, and home improvement records, until you have sold your house and completed the taxes for the year of the sale.
- Automobile records – Retain car titles and auto insurance documents until you sell the vehicle.
- Military discharge papers
Documentation of your identity is usually requested when you start a new job, open a bank account, or apply for retirement benefits – these records should be readily available.
Supporting tax documents (keep for seven years)
Any supplemental financial records that you might report to the IRS should be stored alongside your corresponding tax returns. The Internal Revenue Service (IRS) advises to retain records between three to seven years, depending on the type of record in question. Therefore, the golden rule is to keep these documents for seven years:
- Personal and business tax returns
- Estimated tax payment records
- W-2 statements, 1099 forms, K-1 schedules, and any other tax reporting documents
- Business income and expenses, including workpapers, financial statements, and general ledgers, if applicable
- 529 account contribution and distribution documents
- Charitable donation receipts
- Property tax bills
- Mortgage statements
- Receipts for any other deductions
Pay stubs and bank/credit card statements (keep for one year)
Many banks and employers provide statements and employee pay stubs electronically. You can typically find past statements by logging into your bank or credit card account. Whether you choose electronic or paper delivery, always review to verify that all the information is correct. You can safely dispose of the following after one year:
- Monthly bank statements
- Monthly brokerage account statements
- Credit card bills – Review these carefully upon receipt to ensure accuracy. Retain that bill using the seven-year rule if there’s a tax-related charge.
- Pay stubs – Compare your end-of-year pay stub with your W-2 each year to ensure they match.
After you’ve verified their accuracy, you can discard utility bills and deposit and withdrawal records after one month. However, if you own a business, hold on to your utility bills for longer – up to a year – for tax purposes.
Proper storage – and disposal – is key
In this age of identity theft and privacy concerns, meeting high standards for information security is critical when storing or disposing of financial documents. Paper documents should be stored in a safety deposit box at your bank or a secure, fireproof box at home.
To minimize clutter and save storage space, convert paper documents to electronic files. Scan the documents clearly to ensure no information is missing, then securely dispose of the physical copies. For essential documents like birth certificates and social security cards, keep both a hard copy and a digital version. When storing electronic files, ensure the folders are encrypted and password protected. Be cautious about granting access to others and regularly review these permissions. If you own a business, maintain a clear separation between personal and business files while ensuring both are equally secure.
Consider using a general naming framework to make sorting and locating specific documents easier. An example of a naming framework could be “Year_Category_Description” which when applied to a Closing statement for a rental purchased in 2024 would be “2024_Rental_XYZ Closing Statement.”
When you’re ready to dispose of important documents and financial records, shredding is the recommended method. Purchasing a paper shredder allows you to dispose of documents at home. Additionally, many communities and libraries host “shred days”. For electronic files, consider using cybersecurity software that digitally “shreds” files for enhanced security.
