By Randy Neumann
How long should you keep your financial statements?
The answer is: It depends. On what, you might ask? It depends on what kind of records we are talking about, where you are economically and where you are in your life cycle.
Let’s begin with the “Big Kahuna” – the Internal Revenue Service. The IRS urges taxpayers to keep federal tax returns until the period of limitations runs out. What does that mean? Well, limitations equal the time frame that you have to claim a credit or refund, or the time frame during which the IRS can levy additional taxes on you. This logic applies to state taxes as well.
Let’s flesh this out a bit. If you file a claim for a credit or refund after you have filed your tax return, the IRS expects you to keep the relevant tax records for three years from the date you filed your original return, or two years from the date on which you paid the tax, whichever comes later. If you claim a loss from worthless securities or bad debt deduction, you should retain those records for seven years.
Lastly, if you filed fraudulent returns or no returns, you could try the Steve Martin defense, “I forgot!” However, it would make better sense to keep all related and relevant documents for seven years. The IRS suggests that you retain employment tax records for at least four years after the date the tax is due or paid, again, whichever comes later.
Although tax people tend to advise clients to keep their records forever, most will concede that canceled checks, receipts and other documents supplemental to returns can usually be safely discarded after three years. This is because the standard IRS audit goes back three years.
Now let’s move on to assets. Tax records relating to real property or “real assets” should be kept for as long as you hold the asset and for at least seven years after you sell, exchange or liquidate the asset. These records can be used to calculate appreciation, depreciation, amortization or depletion of assets with regard to real property. You might also want to keep receipts and tax records related to major home improvements because, if you sell your home, you can show the buyer how much money you put into the house.
How about brokerage and mutual fund statements? The annual statement is the one that counts, so you can dispose of your quarterly and monthly statements after you have checked to see that the annual statement agrees with them.
This brings up a brand-new topic: how to properly dispose of financial records. The best way to do this is to purchase a shredder. Do not throw your statements in the garbage or leave them in the recycling receptacle. That would make it too easy for Dumpster-divers to get their hands on your financial information. If you don’t want to spring for a shredder, rip your statements up into little pieces while watching TV and shake well before you throw the shards out.
What about monthly or quarterly statements from IRAs and 401(k) plans? Again, as with other investment statements, the annual statement is the important one. Also, you’ll want to hang onto form 8606, 5498 and 1099-R.
Form 8606 is the one used to report nondeductible contributions to traditional IRAs. Since most income from an IRA is taxable, some day you might have to prove your point to the IRS when you take a nontaxable deduction. Form 5498 is the one your IRA custodian mails to you. It is also called the “IRA Contribution Information” or “Fair Market Value Information,” and it usually arrives in May.
This form details contributions to your traditional or Roth IRA, and the fair market value of that IRA at the end of the previous year (this is what your Required Minimum Distribution is based on) if you are over 70 1/2. Lastly, your IRA custodian will mail you form 1099-R, which shows any withdrawals taken during the previous year.
What about bank statements?
The rule of thumb is three years, in case you get audited. Some people shred bank statements immediately fearing identity theft; however, if push comes to shove, e.g., you get divorced, are brought into court or a creditor comes knocking, you may want to refer to them. One solution would be to ask the bank for copies, but, these days, they usually charge for that service.
To wind things up, based on advanced technologies available today, some financial advisers are offering clients a valuable service.
They can scan client documents into a secure electronic vault, shred the paper and make the documents available to the client and other advisers whenever needed.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann CFP® is a registered representative with securities and insurance offered through LPL Financial. Member FINRA/SIPC. He can be reached at 12 Route 17N, Suite 115, Paramus, 201-291-9000.