Do you toss everything? Or are you a pack rat holding on to every document for all eternity, just in case? In case of what, you can’t be sure, but you’re not going to throw it out. The fact is, the best record retention process is somewhere in between. Setting up a filing system and a purge cycle will help you know what to keep and how long to keep it.
Active Files/Short Term
Active files can be purged yearly or more often in some cases. As the name suggests, they contain documents that reflect activity. Items such as utility bills, receipts, medical expenses, and the like are all considered active files. If you’re setting up a filing system and purge cycle, begin by discarding all but the most recent of these documents. To break this down even further:
- Utility bills can be shredded (or deleted if you have online billing) after verifying payment
- Debit/credit card receipts should be kept until you compare them to your most recent statements
- Bank statements if you’re not getting these in the mail anymore, print out the most recent one in case you ever need to prove your balance
- Quarterly retirement statements should be retained until you receive the annual summary. Hold onto your annual summaries until you close the associated account(s).
- Insurance policies are typically renewed annually or every six months. Hold on to the policy documents until you get the newest ones
Create a Tax File
Documents related to income, charitable contributions, business expenses, or other deductions must be saved. Create a section in your active files for storing these items each year. This will help you at tax time to find the documents you need and file more easily or provide the complete package to your tax preparer. Your tax file should include:
- Proof of income such as dividends and interest, bank and brokerage statements, W-2s, 1009s, mutual fund statements, etc.
- Deductions include charitable donations, health care expenses, self-employment/business expenses, child care, and mortgage interest
- Receipts/invoices for deductible expenses and mileage logs if applicable
Filed Tax Retention
Once you’ve filed your taxes, it’s generally recommended to hold on to the supporting paperwork for seven years. Some special circumstances would increase this to 10 years. Check with your accountant or tax professional to understand your situation. Purge any tax documents older than this range. Organize the ones you’re saving in files labeled with the tax year and the destruction date. If you need to save space, the IRS does accept electronic records, so you can scan and save everything to the cloud or external hard drive. Check out this handy info from the IRS to learn more about what you need to keep and for how long.
There are some documents you do need to keep forever. These include warranty and instruction information for major purchases you still own, investment information, legal correspondence and related documents, and car and property information. If you’re not sure, check with an accountant. Also, consider having a permanent file for hard-to-replace vital records such as title/deeds, birth certificates, marriage or divorce information, passport, and military records. Ideally, these should be stored in a fireproof safe or safe deposit box at the bank. **Investment firms are now required to maintain cost-basis information, but that wasn’t always the standard, so hang on to hard copies or the digital form if your financial provider does not.
Some documentation is only applicable to specific assets, like a deed or car title, for example. These types of documents should be kept for as long as you own the asset but can be discarded when it’s no longer in your possession. Documentation like this includes:
- Real estate such as deeds, property abstracts, mortgage, and closing documents, insurance information, receipts for home repair and improvement
- Vehicles such as titles, lease agreements, purchase documentation, owner’s manual, registration, and insurance
- Household items such as receipts and warranty information, and user manuals
- Financial info such as investment or stock statements and retirement plan records
Unless you’re holding onto something because you’re working through a dispute, might return a product, or are waiting for a claim to be paid, you probably don’t need it. The whole point of a records retention schedule is to help you keep what you need for only as long as you need it. So if you’ve got a stack of receipts that aren’t serving a purpose, send them away with love.
Most credit card and bank companies have a limited time frame in which to settle a dispute. If you’re keeping them longer than that timeframe, you’re making it harder on yourself to clear up something down the road. Anything you’re holding onto because you “might need it” is likely available electronically.
Where to Keep It
While much of this can be kept in a good filing cabinet, a safe is suggested, preferably a fireproof one. This will protect your important documents from theft and damage. Fireproof safes will have a rating from the Underwriters Laboratories (UL), indicating how long the items inside remain undamaged during a fire. These range from half an hour to five hours. If you live in an area that qualifies for flood insurance, you may also want to consider a waterproof safe. Wall safes or standing safes are a good solution if you’re concerned about theft.
Whenever possible, digital storage is also a good idea since you can access it from anywhere. In addition, some space-wasting items can be electronically stored. These include:
- ATM receipts
- Bank statements
- Medical, utility, and credit card bills
A bank safe deposit box is another option for storing your vital documents. To access it, the bank must verify your information, never leave anyone unattended in the vault, and requires two keys (yours and theirs) to open it. Of course, they’re also stored in an alarmed vault with high levels of security. Note that the FDIC does not cover items kept in safe deposit boxes in case of damage.
As you’re setting up your files and purge cycles, speak with an accountant or other professional if you have any questions. If the whole thing seems too overwhelming to take on, a professional organizer like me can help you bring your files and your life back into an organized balance.