Cleaning Up Your Financial Records

Your file cabinet is overstuffed, your desk is cluttered with old bills and you spent the last hour searching for your HMO Plan Description -- sure signs you need a record keeping makeover. The following checklist should help you determine what you should keep and what you can safely toss away.

Your Will

Keep copies of your will, living will, and durable power of attorney where they are safe and easily accessible. Before you file originals in your safe deposit box, check to see if the state you live in seals the box upon its owner’s death. If it does, it’s best that you leave the originals with your attorney.

Tax Returns

Tax returns and supporting data should be kept for at least seven years after your original return is filed. The IRS generally has three years to challenge your tax return; that can be extended to six years if the IRS has reason to believe that you substantially underreported your income by omitting from gross income an amount greater than 25 percent of the gross income stated on your return. There is no time limit on when the IRS can institute an audit if the return is fraudulent or if no return is filed for the year. Even though it may be safe to throw out the supporting data after seven years, it’s recommend that you hang onto the returns themselves since they provide an excellent financial history.

Life Insurance Policies

Keep insurance policies in a fireproof home safe or in your safe deposit box. Be sure to include information on any other life insurance you may have, such as policies with your employer, mortgage-life or credit-life insurance, and any death benefits due you as a veteran of the armed services.

Your Investments

For tax purposes, you need to hang onto buy-sell trade confirmations to show when each security was bought and sold, the price you paid and commission charged. If you are reinvesting dividends, you should keep your dividend reinvestment statements as well. Seven years after you file your return showing a gain or loss from selling the securities, you can safely discard your confirmations and dividend reinvestment statements.

As for your monthly or quarterly brokerage statements, there’s really no need to keep them if your annual year-end statement summarizes all transactions made during the year.

Bank and Credit Card Records

Keep receipts of your bank deposits and ATM transactions until you receive your bank statement and can verify that the transactions were properly posted to your account. Then feel free to toss them. There’s also no need to file away years of canceled checks; save only those needed as support for tax purposes.

Check your credit card statements when they come in to be sure that your charges and payments are posted correctly. Retain them only if you think you might need them to substantiate a tax deduction, verify a purchase, back up a warranty, or track spending.

Personal Papers

Some records should be retained indefinitely. These include the following: birth and marriage certificates; separation and divorce documents; real estate deeds, titles, and property surveys; military records; passports and citizenship or naturalization papers; Social Security cards; and family health and immunization records.

Retirement Plans

It’s a good idea to keep indefinitely (or until your retirement funds are depleted) retirement plan documents from your pension, profit sharing, 401(k), and IRAs, along with annual statements showing the status of your plans. Also, be sure to keep records of any nondeductible contributions made to your employer-sponsored retirement savings plan or IRA. You will need this information to avoid paying tax twice on the same money.

Bills and Pay Stubs

Once you’ve paid a bill and verified that the check has been cashed, you generally can throw away the bill. You may want to keep bills for jewelry, furniture, and other major purchases in case you need to prove their value in the event of loss or damage. Receipts for items under warranty should be kept until the warranty expires.

It’s a good idea to keep your pay stubs until the end of the year, when you can compare the year-end totals with the amounts shown on the W-2 form you get from your employer. If the information matches, you can discard your pay stubs. Make it a point to keep your financial paperwork under control on a regular basis so you can spare yourself the overwhelming task of sorting through years of financial documents down the road.