Record Retention: To Shred or Not to Shred by Darren Zagarola

Snow days were one good thing about the recent winter – it meant sledding with my children. But during the last storm, I spent most of my time shoveling and sitting in my home office with my wife reviewing our personal files to determine what we needed to keep and what we could throw away. As you might imagine – I’d much rather be sledding.

Record retention is an important topic though, and one that is often overlooked and misunderstood. The phrase “record retention” is defined as the storage of records no longer active. Most people maintain paper files for much longer than necessary. We all have seen the overstuffed filing cabinets, the bulging shoe boxes with bank statements and cleared checks, and the user manuals for the 8-track or VCR that you used to own. One of the most common questions I receive as a comprehensive financial life planner is “How long should I keep my files before discarding?” This question is especially common this time of year as we’ve just passed April 15th.

One of the most important recommendations I can make is “Shred what you don’t keep!”

Wondering why you can’t simply ball it up and throw it away? The answer can be summed up in two simple words: “Identity Theft.”

Paper records contain your most personal information (social security numbers, birthdates, and account numbers). With identity theft more prevalent than ever, it is good practice to shred all paper records that no longer need to be retained, effectively protecting your financial health over the long-term.

As I am a socially responsible individual, I also recommend recycling the shredded paper if you can. When it comes to being green, many people opt to scan their important files and store them digitally on home computers. This is a great solution, so long as you protect those digital files. Implement reliable software and strong passwords to prevent your information from being hacked. And use a computer you own; not a work computer, for example. In addition to other people, such as your IT director, having access to your sensitive data, the employer technically owns all data saved to a computer they supply you.

When it comes to “how long” to maintain most personal financial records, there are no hard and fast rules, just guidelines, with the exception of IRS regulations for income tax records. Generally speaking, anything related to calculating income tax should be kept for a minimum of three years, but often no more than seven years. There are some exceptions to the seven-year rule, and they are noted below. To stay on top of the chaos, we recommend reviewing and cleaning out files at least annually.

Here is a list of types of personal records and their recommended holding periods:

  • Income tax returns and supporting documentation. The general rule is seven years. The IRS has three years to audit a tax return with the following exceptions: underreported income greater than 25% has a six-year statute of limitation; fraud has no time limit.
  • Bank statements. Maintain three months of bank statements if you’re planning to apply for a mortgage. Otherwise, shred the statement once the check book has been balanced. Should you require them, banks will furnish copies of past statements upon request.
  • ATM receipts. Shred once the checkbook has been balanced.
  • Canceled checks. Shred once the checkbook has been balanced, unless they are needed to support an income tax return.
  • Credit card statements. Maintain three months of statements.
  • Credit card receipts. Keep until statement is received and reviewed. Maintain for seven years if business related.
  • Pay stubs. If year-to-date information is reflected on the most recent pay stub, the individual statements from throughout the year are not needed. Save the most recent pay stub only until the checkbook has been balanced. Note that three to six months of history may be requested by some mortgage companies if you are planning to apply for a mortgage.
  • Investment documents. Capital gains and 1099 forms should be maintained for seven years with the corresponding tax return. Confirmations of trades in non-retirement accounts should be maintained indefinitely or until the asset is sold in order to determine the cost basis and related capital gain on the sale of the asset. Then they should be included with the tax return support for the year of the sale. Prospectus can be shred or discarded immediately (after reading, of course).
  • Medical insurance. Premium statements, doctor’s bills, prescriptions, and hospital bills should be maintained for five years from the date of service.
  • Home/Auto/Umbrella insurance. Keep insurance records for five years or until the asset is sold, whichever is less.
  • Home repairs. Maintain as long as you own the property, but no less than 10 years because of warranty and workmanship guarantees.
  • Utility bills. Keep bills for three months unless you are writing them off for tax purposes.
  • Mortgage documents. Maintain as long as the mortgage is open. Once paid off, maintain for seven years.
  • Warranty documents. Keep as long as you own the product; shred once the product has been discarded.
  • Non-deductible IRA contributions. Maintain indefinitely or until the money is withdrawn from the IRA.
  • 401(k) statements. Shred quarterly statements once the annual summary arrives. Maintain annual summaries until the account is closed.
  • Monthly bills. Shred once payments clear on the bank statement. Proof of purchase for larger items should be maintained for insurance reasons.
  • Auto records. Maintain as long as you own the car.
  • Purchase price of home and documentation of capital improvements, such as a deck or a roof repair. Maintain until the home is sold.
  • Charitable contributions. Maintain receipts and acknowledgement letters with applicable tax returns.
  • Satisfied loans. Maintain for seven years.

There are also some types of documents you should never discard. Some examples include: birth certificates, adoption paperwork, education records, professional license records, military records, marriage licenses, divorce decrees, and death certificates.

These general guidelines should help you maintain a clean and organized financial household. While you’re in organization mode, one final recommendation is to take time to review your monthly bills (house related, credit cards, ATM withdrawals, etc.) and create a budget document for yourself. This will assist you and your financial advisor in developing an accurate cash forecast for your financial plan.

Darren Zagarola is a CPA and Certified Financial Planner with the wealth management firm of EKS Associates in Princeton, NJ.

Record Retention: To Shred or Not to Shred