Stack of tax documents on desk.

March 15, 2018

Quick Guide for Which Financial and Tax Documents to Keep

Fear of being audited leads many people to stash an unnecessary amount of paperwork. Tax season is a good time to face those fears and free yourself of paranoia—along with that bulging filing cabinet.

Digitize Your Financial and Tax Records

The IRS accepts electronic records, so there's typically no reason to hang on to a statement or other piece of paper just because it was issued by your bank or other financial institution. Scan the originals to a digital format or consider going paperless by getting your statements electronically.

Make sure you back up your data and consider keeping a copy off site, either in physical form (such as on a CD or USB drive) or encrypted in the cloud.

Few Documents Are Irreplaceable

If your biggest worry is that you'll shred something you'll need later, take heart. Most documents can be re-created. Banks and brokerages keep electronic versions of your statements for at least six years and sometimes more, though they may charge you to get new copies.

Your biggest risk of being audited is in the first three years after you file a tax return, although that limit can be extended to six years if you under-report your income by 25 percent or more. You may hear tax experts say to keep paperwork for seven years. What they mean is seven years from the relevant tax year. So if you file your 2017 return on April 17, 2018 you'll want to keep those records until April 2024— seven years from 2017.

Some Documents Should Be Kept Longer

Paperwork that relates to a potentially taxable investment or asset, such as real estate or your stock portfolio, should be kept for as long as you own the asset plus six years after you file the relevant tax return. But again, you needn't hang on to paper—scans are fine.

Many tax pros recommend hanging on to your actual tax returns for life, although you're welcome to shred the supporting documentation after the audit risk has elapsed.

Keep the Summaries, Ditch the Rest

If you're still getting paper trade confirmations, you can shred and discard them once you compare them to your brokerage statement. If your brokerage issues year-end statements, you can discard the monthly ones. You can discard pay stubs once you get your W-2 and compare it to the summary on your year-end pay stub.

ATM receipts and deposit slips can be shredded if they match what's shown on your statements. Once you reconcile credit or debit card receipts with your statements, keep only the ones that are needed for tax purposes or that document a major purchase. Worried you may need receipts in case of problems with smaller purchases? Set up a file each quarter for miscellaneous receipts, and discard them after six months or so have passed.

Purge Your Retirement Accounts Files

Your IRAs, 401(k)s and other retirement accounts don't qualify for capital gains tax treatment, so there's no need to keep track of what investments you bought when. The only thing you need to retain is documentation of any nondeductible contributions, which you should have been reporting on your annual tax returns using Form 8606.

You should keep those forms indefinitely, along with Form 5498 your IRA custodian sends you that summarize your account activity for the year. If you transfer your accounts—you roll your 401(k) into another employer's plan or change IRA custodians—keep that paperwork as well.

One other exception: If you contributed to a 403(b) account before 1987, keep your old account statements indefinitely to prove you made the contributions. This money doesn't have to be withdrawn until age 75, while other retirement money generally has to come out earlier.

Documents to Keep Forever in Paper Form

We're still not a paperless society, and it can be a hassle to get certain documents—such as birth, marriage, death and title certificates, licenses, deeds, Social Security cards, military service records and divorce decrees—re-created if we need them. Keep these secured in a home safe or safe deposit box and consider making digital copies as a backup.

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This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations and readers should seek professional advice.

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