5 Financial Records You Can Trash Now
by Chuck Jaffe
Nothing like shredding old documents to feel rejuvenated.
No one likes paying taxes. But everyone likes shredding old tax papers.
That's why one of the best ways to celebrate the end of the frustrations of tax season is to trash documents that clutter the filing cabinet but aren't needed anymore.
Most people are a bit afraid to toss financial documents, unable to separate what is meaningful and necessary from what is frivolous and outdated. That gets even more confusing when the rules change, which is precisely what is happening this year.
Starting in January, brokerage houses had to start providing cost information on stock purchases for customers. That has had many investors thinking they could empty their files of old confirmations, which might ultimately be true but which would almost certainly be premature during this year's spring cleaning.
With a particular eye towards that new rule -- but keeping in mind that purging files is one thing sure to feel good in a market where nothing feels too good -- here are some guidelines for keeping or shredding various types of financial statements:
1. Investment papers: When you sell a security that is held in a taxable account, you need to be able to say what you paid for it, or at least be able to come up with a good-faith estimate of the price you paid. That way, you can calculate your profit or loss.
With that in mind, investors have always been told to keep documents that establish their cost.
The new rules require brokers to establish and maintain records about cost for stocks purchased beginning this year (the rules for mutual funds don't kick in until 2012). While many brokerages have been providing cost records for years, unless you are sure that your firm has the information and it is correct, hang on to older confirmations.
The brokerage firm may not have records of old transactions, nor will it have the cost basis on securities you transferred into the account. If you have a stack of confirmations, check them against what the brokerage shows on the statement. Only once you are sure the firm has the right numbers should you get rid of old confirmations.
For mutual fund purchases, hang on to your final statement of each year -- the one showing all purchases plus any reinvested distributions. Everything else can be shredded.
2. Tax records: Just because you got a refund (or paid a bill) does not mean you are finished with your tax return. The other extreme affects people who believe that because the paperwork involves the Internal Revenue Service it must be kept for a lifetime.
Assuming you are not filing fraudulent returns -- for which there is no statute of limitations -- your income tax return boils down into several different types of paperwork. Remember, too, that most tax preparers and accountants keep copies of your documents for the life of your relationship, so there may be a backup of older documents even if you shred your paper copies.
Start with the return itself, typically the one document clogging people's files. Old tax returns -- especially those covering the purchase or sale of property -- can be important for compiling future returns, possibly decades into the future.
Support documents and backup paperwork -- any and all of the information that helps determine what you owe, from receipts to canceled checks, to bills, and tax forms -- must be kept for three years after the return was due. That means that the bulging file of stuff from 2007 can now be purged, as that return was filed in 2008 and the three-year period ended this spring.
Before burning those older tax documents, pull out anything related to home improvements and any records covering dividends or capital gains that were not part of year-end investment statements. Those documents may come in handy for calculating profit or loss when you sell the home or investment.
If you are ultra-cautious, keep forms related to your income for six years, the length of time the IRS has to challenge a return on which it believes gross income was underreported by 25% or more.
3. Pay stubs: Assuming you received everything you were entitled to and have no dispute with your employer, dump the paycheck stubs. Use the last stub of the year to cross-check your employer's tax reporting, get the value of any donations you make through your paycheck and, depending on circumstances, to have the amount of money you paid out for health-care coverage. Armed with that information, you can shred the year-end stub too.
4. Consumer bills: While bills may track your financial life -- where you paid 50 bucks for gas or how much your favorite winter coat cost when you bought it in 1997 -- they're not worth keeping.
Credit-card statements, utility bills, department-store and service-station charge-card bills should be kept long enough to verify the information and make sure your payments have been properly credited. After that -- and unless you have expenses that could qualify for tax deductions -- there is no real reason to hang on to these documents.
There are some exceptions. In divorce cases, records may be important in determining who pays the child's expenses and can claim the child as a dependent on a tax return. You also should retain any bill on which there were disputed charges, fraudulent card use, and other problems. Keeping those bills -- along with notes on how and when you resolved the issues or got extraneous fees or charges waived -- could come in handy if the negative information shows up on your credit report.
If you used a credit card to pay for home improvements -- since home improvement expenses have tax implications -- keep that too.
In addition, with credit cards that have "buyer protection," keeping credit-card bills and receipts for big-ticket items makes sense. Some organizational experts suggest stapling receipts for protected items to the monthly credit-card bill, creating a record of where something was purchased and how it was paid for; if the item is lost or stolen, the receipt/bill combination is a clear proof of purchase.
5. Bank statements/canceled checks/ATM slips: These days, most consumers don't actually get canceled checks, but instead get mini-photo images of checks they have written. Either way, there is absolutely no reason to hold onto an old check from, say, a trip to the grocery store or a purchase at a flower shop; once that item has hit your account it ceases to be useful.
Sort the checks with tax ramifications, such as charitable contributions, mortgage or tax payments, home improvements, and the like. Once you balance your checkbook, toss the statements, the remaining checks, and any slips from automated teller machines.
And if you haven't balanced your checkbook in years and have stacks of old statements sitting around the house, get a grip on your reality: If there was an error in your checking account back in 2009 -- let alone 1989 -- and you haven't found it by now, you're not going to. Shred the papers or have a bonfire; you'll feel much better when your spring cleaning is done.