When to Shred!
by Tom Sbarra
It is surprisingly difficult to find unbiased information about retaining financial records. It seems (what a shock!) that everyone is trying to sell you some record keeping gizmo or expensive service.
Thanks to Eric Asendorf at Janney Montgomery Scott and the better business bureau, I was able to find some more objective information.
Remarkably, for individuals as opposed to businesses, there are no concrete “rules” about how long documents need to be retained. This has led to keeping things longer than you need to, cluttering your house and making it hard to find things when you require them.
Most of what is conventionally done, keep things for 7 years, is because of concern about IRS audits. Audits are more likely if there are unusual tax deductions, like those associated with home renovations or large unreimbursed losses. Although the IRS generally requires only 3 years of records, in a few circumstances they can require you to have them back 7 years. To simplify and to erase all doubt about which is which, we will say you should keep anything you think the IRS is interested in for 7 years. There are lots of good things about being retired, one of which is simplified tax returns. This will lead us to a fairly simple strategy for managing these records.
If you are retired, you don’t have to worry about tax-deductible expenses as you would for a business or if you had work related costs. Since expenses are no longer tax deductible, there is no need to retain receipts from auto use or purchases. You don’t have to document most expenses as they are not tax deductible. If you are making only rare, unusual deductions you can simply save records of those transactions.
If you have no other source of income except Social Security and investment dividends, you need only retain records that relate to that income, In short: save the tax returns, income statements include Social Security income, interest, dividends and income from sale of property or stock. These should be adequate for filling out next year’s tax return, and greatly reduces record keeping, narrowing your tax return to a few lines.
On another front, there are papers that need to be retained indefinitely; wills, passports, deeds, pension plan documents, auto titles, and medical records. Keep them in a safe place, either a safe deposit box in a bank or a small fireproof box in your house. It wouldn’t hurt to have a trusted relative know where these papers are in case you suddenly die or become incapacitated. Similarly, it would be sensible for you to have your computer passwords noted somewhere to allow loved ones access to your digital life. If you choose to keep things in a bank deposit box, tell someone where the bank is and where the key is kept. It would be sensible to also have copies at home for handy reference.
In the ‘usual retired person’ situation, records are of 2 types: those that should be kept indefinitely and those that should be kept for 7 years:
Retain for 7 years
Income statements from social security, pension plans, payments from investments and annuities and from recent property sales.
Receipts of tax rebates from the prior year
Taxes paid: including income tax, property tax, excise tax on your car or sales tax receipts for big purchases such as autos, appliances or home improvements.
Medical expenses: such as out of pocket drug and professional medical and dental costs. Medical insurance premiums, including for Medicare, supplemental insurance and drug plan premiums.
Donations to church and charitable organizations
The important papers you need to retain forever, either in a safe deposit box or in a fireproof box in your home include:
Records of prior IRS audits
Records of stock or other investment purchases (until 7 years after they are sold)
Mortgages and deeds to property
Title to your car
Pension plan documents
Birth and marriage certificates
Here is the simple strategy: Since the maximum time the IRS would be able to question your return is 7 years, one idea is to put these receipts in yearly folders, save them for 7 years and each year throw out the oldest folder. Simple! Every piece of the papers mentioned above has sensitive financial information on it and should be disposed of securely.
This is a quick guideline. You should consult your tax or investment advisor if you have any questions.
Thanks to Eric Asendorf of Janney Advisors for his help researching this article.
Tom Sbarra is a volunteer and a board member of Neighborhood Falmouth.