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Organizing Your Financial Paperwork: What to Keep and What to Toss

Insights & Ideas Team •  April 14, 2015 | Your Finances

Did the recent tax season find you drowning in paperwork or inundated by electronic files from your various investment accounts? Take heart—maintaining your tax documentation doesn’t have to be overwhelming. In fact, you may not need to hold on to financial records as long as you think you do.

“A good rule of thumb is to keep any tax return documentation for the statute of limitations period—in other words, the window of time during which you can amend your tax return or the IRS can assess additional tax,” says Northwestern Mutual Advanced Planning Attorney Matt Johnston.

In most cases, that’s just a three-year window. That means that three years after you filed your taxes, you can get rid of the return itself, as well as cancelled checks, W2s, and receipts for charitable contributions and other deductions. If you filed your taxes before the return due date, then it is three years from the due date.

If there’s any chance that you underreported income, hold on to your tax returns and supporting documents twice as long: the statute of limitations is extended to six years.

When to Hold on Longer

There are a few exceptions to these rules, including paperwork that verifies carryover items on your tax return or cost basis for an asset, Johnston notes. Carryover items include losses and charitable contributions that you can’t claim in a single tax year. Cost basis means the original price you paid for an investment plus any basis adjustments. When you sell the investment, you’ll pay capital gains tax on the difference between your selling price and its cost basis.

“You’ll want to save gift tax returns and estate tax returns, which are important for reporting the cost basis on items,” says Johnston. For instance, if you inherited stock from your grandmother when you were 22 years old and have held the stock ever since, your gift or estate tax return will give you the original cost basis needed to calculate your capital gains or loss when you ultimately sell the stock. Cost basis for any investments you make on your own should be reflected on your annual statements, which you should keep as long as you hold the investment.

Finally, hold on to tax returns if you think you’ll need to refer back to see how you handled a special item in the past. “You can request copies of past tax returns from the IRS, but it can take a long time to get them,” says Johnston. It’s easier to keep the records yourself—especially if you simply scan and store an electronic copy of the return and supporting documents.

Some Paperwork Is Forever

If you did not file a tax return in a given year, you should keep the records related to that tax year indefinitely. While you’re sorting through tax documentation, take the opportunity to review the location of other important paperwork that needs to be kept long term, and decide where to keep it. A bank safe deposit box can be a good option. “If you can’t keep items in a safe deposit box, at least use a fireproof/waterproof box that you can keep in a safe location,” Johnston recommends. “Whenever possible, scan your important papers and keep the digital backup in a secure, password-protected format,” such as an external drive or a cloud-based storage system. He warns against consolidating all important identification information in unsecured digital files, however, because it can put you at risk for identity theft.

Use a safe deposit box or fireproof box for permanent items such as:

  • Birth certificates, Social Security cards, passports, marriage certificates and divorce decrees, and citizenship and adoption papers.
  • Education and military records.
  • Wills and trust documents, power of attorney documents and advanced directives.
  • Copies of insurance policies and contact information for your life, disability income, homeowners, car and liability insurance.
  • A home inventory that keeps track of your valuables. You can download a guide from the Federal Citizen Information Center.

Use the same storage for other important papers, including:

  • Mortgage documents and home improvement receipts (until you sell the property).
  • Vehicle title (until you sell the car).
  • Annual investment statements that will help you determine cost basis (until you sell the investments or close the account).
  • Stock and bond certificates (until you sell them).
  • Loan documentation and release of lien (until you sell the item).
  • Receipts and warranties for large purchases (until you sell or discard the item).
  • Proof of health care insurance coverage, including copies of insurance cards and explanation of benefits statements.

The last step after creating your secure records system is to let your loved ones know where everything is kept. Maintain a central file that lists all of your account numbers, online account login information, titles and contact information for everything from your credit card numbers to your 401(k) provider. In the event of your untimely death or a debilitating illness, you want to ensure that your family can carry on without any unnecessary disruption to their comfort and security.

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