Is your garage or attic cluttered with boxes of old utility bills, bank statements or pay stubs from your college restaurant job? Many of us err on the side of keeping everything, just in case we have a dispute with the cable company over a cancelled 2015 HBO subscription.
Good news: Most of that stuff can go sooner than you may have thought.
There are different rules for different types of records. Some important original documents should be safeguarded in perpetuity, while others can be shredded before they gather dust. Here is a brief overview of the rules and best practices for retention, storage and ultimate destruction of personal records.
It seems obvious that certain critical documents should be kept in a safe location and retained forever. For most of us, a good quality fireproof portable safe is adequate for these important papers. Popular Mechanics recommends selecting a model certified to withstand at least 1150 degrees Fahrenheit for 30 minutes. Some people also maintain a safe deposit box at a local financial institution, which may be more secure but is not accessible outside of normal business hours or by family members in the event of an emergency if they are not authorized.
The more paperless you can become, the better. While a few original records must be maintained in paper form, most financial documents like bank and brokerage statements and credit card bills can be stored electronically on a reputable cloud storage service or on a portable hard drive device. Electronic records, properly organized, effectively eliminate the need to even worry about when to discard a document.
Some permanent documents you should not store in a deposit box include original copies of your will, as well as medical and financial powers of attorney, since the need to locate these papers likely implies your own inability to visit the bank. These should be kept in your fireproof box with a copy held by a family member or trusted advisor. Also keep your passport at home, along with any emergency cash and items like spare keys.
Other records you should retain forever, in a fire-resistant safe or a deposit box, include birth certificates, marriage and divorce certificates, military records, Social Security cards, adoption papers, medical records, and educational papers and diplomas.
There are also certain documents that should be retained until they are no longer valid. For example, real estate purchase documents, deeds and capital improvement receipts should be kept as long as you still own the property but can be destroyed once the property is sold unless they are needed for tax returns. Other examples include car titles, auto repair history and warranty information that can go once they are no longer relevant.
Many people think they know how long they must keep tax records, and they are likely wrong. As with most questions directed at the IRS, the answer to “How long should I keep it?” is “It depends.”
If you complete your return honestly and on time, you are only at risk of an audit for three years, after which you can safely destroy the original returns and supporting documentation. However, if you claim a tax deduction for a worthless security or write off a bad debt, you must keep records for seven years. If you under-report income by more than 25%, the number is six years, and if you do not file a return or file a fraudulent return, you must retain the records forever. Here’s an easy rule of thumb: Unless you cheat on your taxes, just digitize a copy and save it for seven years.
Bank, investment and credit card statements can technically be dumped once you receive the next statement and reconcile the transactions but keeping them for a year is a decent compromise unless you need them for taxes. Note: These are all available electronically, so ask yourself why you’re still getting them in the mail anyway. Most other routine documents like utility bills can be destroyed once the payment shows up on your account. Receipts for purchases that are under warranty should be kept until the warranty expires.
Disposal of records is nearly as important as their retention. Anything with personally identifiable information should be shredded and not simply discarded. You may be surprised to know that it is generally legal to root through someone’s trash once it has been placed at the curb for pickup, so don’t leave an invitation to steal your identity.
Personal information that could be used to defraud you includes your address, account numbers, email addresses, phone numbers and Social Security number. Cyber thieves have become quite proficient at putting together seemingly innocuous pieces of information to perpetuate identity theft, so get into the habit of shredding everything.
You can pick up a decent quality crosscut shredder at Amazon or Costco that will make the job less onerous, once you get in a routine of shredding paper statements and receipts when they move outside the retention window. Plus, it’s a mindless task that delivers a disproportionate degree of satisfaction. If you don’t want to bother with the process yourself, the Better Business Bureau offers free shredding and electronic recycling services, as do some other community organizations including AARP. It is worth the effort.
Christopher A. Hopkins, CFA, is co-founder of Apogee Wealth Partners in Chattanooga.