Have you ever looked around your home office and asked yourself why are you keeping all this paper? Now is the time to create your very own personal record retention policy.
A personal record retention policy will let you quickly decide what to keep and what to get rid of. A record retention policy will also make sure you are prepared to fight any audit notice from the IRS or beat back any debt collector that comes knocking on your door. Just think of how satisfying it will be to say “here’s the proof and now go away!” All because your financial records were in order.
But more than anything, you’ll be happy to get rid of all the piles of bank statements and other financial documents that you are keeping on hand.
Corporate Record Retention Policies
Corporations run a high risk if they don’t have a record retention policy. They can have a higher exposure to litigation risks, regulatory risks, and bad customer relations. Now, the corporate record record retention policy is two-fold – retaining records as required for business purposes. And destroying records that are no longer needed. Both aspects are needed in a well-defined and maintained corporate record retention policy.
Most companies save documents for at least seven years under their retention policy. Sometimes, the policy is longer, especially for certain types of documents like employment records that are kept as long as an employee works at the company and some duration after they leave.
This seven years is set based on several different laws, most notably the income tax statute of limitations. For most tax cases, the IRS has three years to audit you unless there is a material under-reporting or other special circumstances in which case the IRS has six years. Add one for the return year, and bam! you have the seven years record retention policy.
Personal Record Retention Policy
You should adopt a similar record retention policy for your personal finances. You can reduce the amount of paper you store and reduce the chances of identity theft. You’ll also have what you need in case of an audit or dispute with a bill collector.
Your personal record retention policy will be very similar to a corporate policy. Most documents will fall into one of three categories: Permanent, Short-Term, Long-Term.
Forever and Ever, Amen
Some paper you need to keep forever and never destroy. These are those really important, identity creating type of papers. These will go into your permanent file.
A few examples include:
- Birth Certificate
- Adoption Records
- Citizenship and Naturalization Records
- Marriage licenses and divorce decrees
- Professional licensing information
- Military records
- Proof that you paid off your student loan! Personally, you might even want to frame that (or a copy with your account number blacked out!)
- Any court orders and particularly satisfactions of judgment or garnishment and bankruptcy orders
- Retirement and pension documents – it may be a long time until you need these, but you’ll want a record of what you put in and what the plan says you’ll get out.
- Investment Records – again, the long-term need for them puts them in the “permanent” file, but a minimum of seven years after sale
- Tax returns
Since there is no statute of limitation for returns that are never filed, I recommend that you keep proof of filing or your copy of the tax return in your permanent records. This includes proof of payment if any taxes were due with your return (another good piece of evidence that you actually did file). Scan these babies to PDF and then destroy the original paper files.
For the other documents, we recommend that you keep these in their original form. In some circumstances, you’ll need to show the original, with the raised certification seal. While you may be able to get new certified copies from government offices, it is best to keep the originals when possible. Still keep scanned copies to help you out in some circumstances (and a scan is better than no copy at all in some cases). You should store the originals in a bank safe deposit box or in a fire-proof locking safe in your home.
Bring On the Shredder!
Now that we have two files – the permanent file and everything else – it is time to start figuring out what we can destroy now (short-term) and what we need to keep around for awhile (long-term). But we can also get to the fun part – watching all those old papers go through a (cross-cut) shredder. Or create a burn pile for a bonfire. Or take the less satisfying way and take the documents to a secure destruction company.
Side note: check to see if you can use your company shredders or document destruction service. Many companies offer this as a fringe benefit to their employees. Why would they do this, you ask? It will take a lot of time out of an employee’s day and productivity if they have their identity stolen. So it is one way for companies to keep their employees productive during the work day.
Destroy After One Year
Some things you don’t need to keep but one year or less, unless they are needed to substantiate a tax deduction or income. Small dollar receipts, like fast food, ATM and regular clothes shopping, can be destroyed as soon as you see the items on your bank account or credit card statement. If you still get paper check stubs, keep them until the end of the year and you match them to your W-2 and Social Security Statement. Utility bills can also be destroyed after one year. Quarterly investment statements can be destroyed after you get your annual statement.
You may need to keep these small receipts or utility bills longer if they are the basis of any tax deductions. Home office deduction? Keep your utility bills. Self-employed and those office supply company receipts? Keep them longer until the tax statute of limitation passes. (See the AICPA Guide to Small Business Recordkeeping (PDF) for more on small business record retention policies)
You can also review all your instruction manuals and warranties. You can get rid of any warranties if you have gotten rid of the item in the past year.
Destroy After Three to Six Years
The IRS has a three year statute of limitation for most returns unless you did something really wrong. After the three years have passed since you filed the return, you can destroy many of the underlying documents. For tax purposes, credit card statements, cancelled checks, and medical bills can usually be destroyed after three years.
Under state laws, debt collectors also have a statute of limitation and cannot file a lawsuit to recover a debt from you. These vary by state but are generally in the four to six year range for most common types of debt. The Statute of Limitation begins when you make your last payment to the creditor.
I will leave you with the caveat that if you are still fighting with a medical provider or other company, keep the records until the dispute is resolved.
Also, while I might get rid of the credit card statements, many credit card companies have a year-end summary that they provide. These are great resource to keep on hand longer to show that you have paid your debts. These summaries, I’ll often keep around for longer. Also, many credit card companies and banks have online access to statements for five to seven years as long as you are still a customer.
Destroy After Seven Years
Now that we are beyond both the IRS and debt collection statute of limitation, we can start destroying a lot of the non-permanent long-term records. Any remaining credit card and bank statements and tax related receipts.
Be careful on how you count the years for some receipts. The clock may not start until some later date. For example, a major house repair? You’ll want to keep that receipt until seven years after you sell your home (capital gains, depreciation, and amortization and all that fun tax stuff). Similarly for investments, you’ll want to keep the purchase and sale documents for seven years after you sell the investment.
It is also important to note that the clock starts for tax purposes when you last file the return or an amended return. If you file an amended return 1-2 years after the original return, because you missed a deduction or some other reason, the clock starts new at that point in time.
How To Store Records
Some very important paperwork should be kept in its original form. Think birth certificates and other certified documents. But many documents can be scanned and kept electronically. Even the IRS says that documents can be scanned into an electronic format to be kept as a backup. This has been true since 1997, when they passed Revenue Procedure 97-22 (PDF, page 9).
You should make sure that the scans are clearly legible and readable. An auditor should be able to view the documents in a readily accessible format. Our recommendation is to scan and store documents in the PDF format since it is widely available. We do not recommend storing the files in a proprietary document storage system that uses weird file formats. These won’t be as readily accessible in the future – think about how often software companies go out of business, especially the smaller ones or how fast technology changes. While PDF will one day be replaced, it is likely that the format will survive until the end of the newest seven year record retention policy.
For all but a handful of very specific cases, scanned documents will be acceptable as long as there is no question as to their authenticity. If you have any suspicions, keep both the scanned copy and a paper copy.
Protect Your Digital Files
If you do scan your documents, please remember to protect your files. Password protect the files and the drives. Encrypt your computer hard drive. Encrypt the USB drives you use. The last thing we want to do is to allow hackers easy access to all your personal finance records. Make sure that you use a secure means of storage. That goes for your paper files too – lock them up!
Tax Time is a Great Time for Document Destruction
You just finished your taxes and you thought you were done. But you’ve got one more step – going through your old records to destroy what you don’t need any more. Since the IRS statute of limitations is based on when you file the return (and not the calendar year), post-tax day is a great time to go through your old records. And doesn’t it feel awesome to lighten your load anyways?
Make sure that you mark when you filed the return. If you filed an extension and didn’t file the final return until October, you need to wait until later to destroy your documents. I’d hate for you to get that audit notice in the next six months and not have what you need. It’s also why companies add that extra year to their retention policy. And I recommend that you do the same.
So get started destroying your old records in accordance with your new personal record retention policy.