With spring cleaning season in full swing, you might be tempted to go Marie Kondo on your entire house, tossing out everything that doesn’t spark joy. Wait! While storing financial documents probably won’t ever bring you joy, not having them when you need them down the road will definitely spark anxiety—and could cause massive headaches when it comes to the IRS. The key is to know how to organize them properly and when you can safely shred them.
“Organizing your financial documents allows you to reduce your paperwork clutter and gain control of your financial life,” says Tony Steuer, an authority on financial literacy and author of GET READY! A Step-by-Step Planner for Maintaining Your Financial First-Aid Kit. “Being able to quickly find your important documents will help you during major life events, such as when you apply for a loan, meet with your estate planning attorney, or are forced to leave your house in an emergency.” It will also help your spouse, children, or executor in the event you become incapacitated or pass away.
How to create an organizational system for each document
Organization is largely about personal preference, so there may be a little trial and error until you find the system that works best for you. One option is to set up folders for each main category (such as bank accounts, car, loans, insurance, etc.). Another method is to use a binder for each fiscal/calendar year with dividers by main category.
“Having them set up by year allows you to easily gather the documents when it’s time to destroy them,” explains Steuer. “I also recommend that you maintain digital copies on your computer and through a cloud backup service such as Dropbox or iCloud.” Simply follow the same principles of setting up a folder for each fiscal year and then sub-folders by main category.
A timeline for keeping vs. shredding
So when can you safely discard these financial documents? Follow Steuer’s guide below:
- Personal papers: These documents—including birth certificates, social security cards, marriage licenses, divorce decrees, and military records—are used in different ways to verify your identity and are required to receive a driver’s license and passport. The originals should be kept forever in a secure location. If you are required to show these documents, usually a copy is sufficient.
- Bank account records: Cancelled checks and receipts should be kept until account statements are received and reconciled. After reconciliation, the only checks and receipts that should be kept are those that pertain to a major purchase and/or are tax related. All other checks and receipts can be destroyed. Retained checks and receipts should be kept with statements for six years; receipts until statement reconciliation.
- Investment records: Trade confirmations, statements, and other related documents should be retained for up to six years after the sale of the security (investment). Keeping original trade confirmations provides documentation on cost basis, which will help you calculate capital gains or losses.
- Credit card statements and documents: If used for tax purposes, keep for six years; otherwise shred statements and receipts after reconciling statement, or longer if you wish to return something. For more details, find out how long you should be keeping credit card statements.
- Loan records: From mortgages to student and car loans, loan records should be kept indefinitely as proof that your loan is paid off. Keeping proof of loan payoff is important in the event that there is an issue with the records of a creditor—a cause for concern given that financial service entities frequently sell loans to loan servicing firms.
- Rental agreements: Retain for up to six years after the lease is terminated.
- Health insurance policy and documents: Until coverage ends or is canceled.
- Insurance documents: Retain for up to six years after the policy has been canceled, which will protect you from any issues that may arise down the road concerning a claim.
- Estate planning documents: Retain these until completely updated. If just a revision, be sure to keep the full document. This includes wills, ethical wills, trusts, health care directives, powers of attorney, final arrangement and other estate planning documents.
- Tax returns and related documentation: These should be retained for six years, as this is the amount of time for which you may be subject to audit. If you are unable to provide documentation as proof, you’ll be subject to IRS penalties and fines. Here are the specifics on the tax documents you shouldn’t toss.
“Some of the documents above have recommendations for when you may be able to safely purge a specific item,” says Steuer, who emphasizes that documents must be shredded to help prevent identity theft. “If there is no purge date, you’ll probably want to keep that document forever or use your best judgment on how long to keep it. Personally, I keep items in files for seven years for any closed account with all of my tax documentation, and after seven years, I destroy the physical documents— but I keep digital copies forever.” Next, read on to find out 13 secrets an IRS agent won’t tell you.