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Financial Documentation: Should It Stay or Should It Go?

May 29, 2013

As we continue to focus on Financial Literacy, we thought we would share with you an article that was recently written by Nicole Sweigard, Nelnet’s Financial Wellness Consultant. I hope you find the information as valuable as I did.

It’s a great time of year to think about financial spring cleaning. Most people have documents they need to save short term, long term, and then those they need to save forever. But how do you know what to keep and what you can shred?

There are two main reasons to keep financial records:

  1. Tax purposes
  2. Proof of payment

The Internal Revenue System (IRS) requires that you are able to produce records proving any income, deductions, or credit claimed for at least three years from the date of a return. This is the statute of limitations for how long the IRS has to assess if additional tax is required on your income. However, if you fail to report income that is more than 25% of your gross income, you will need to produce records for the past six years. As a result, experts recommend that you keep all documents that verify the information in your tax return for at least six to seven years. But what about those other documents?

Bank Statements

Keep for one year, unless related to taxes, home improvements, or business expenses.

Bills

Keep bills for one year. If related to taxes, home improvements, business expenses, or large purchases, you should keep these documents permanently. (Large purchases include jewelry, cars, computers, etc.)

401(k) Account and Brokerage Statements

Keep documentation until you sell. Keep the monthly and/or quarterly statements until the annual statement arrives. If they match, shred the monthly and/or quarterly statements and keep the annual until the securities are sold.

Home or Condominium Records

Keep documentation until you sell. Keep all records relating to the purchase, sale, tax, and improvements done to your house. This is all factored in when you sell for capital gains purposes.

Pay Stubs

Keep pay stubs for one year until you receive your W-2. If they match, shred the pay stubs and keep the W-2.

Taxes

Keep this documentation for seven years or permanently. The IRS has seven years to perform an audit if they feel you made an error, and they have six years to audit you if they feel you underreported your gross income by 25%. There is no time limit on an audit if the IRS feels you filed a fraudulent return. You have three years to file an amended return when claiming a refund. Note: See IRS Publication 552 for a detailed rundown of the types of proof needed to verify various tax information.

Your “save forever” documents should be kept in a safe or a safe deposit box. These documents are listed below:

  •        Birth and death certificates
  •        Adoption papers
  •        Citizenship papers
  •        Military records
  •        Marriage and divorce papers
  •        Immunization records
  •        Passports and social security cards
  •        Updated legal documents such as wills, estate plans, living trusts, and powers of attorney

Organization today will give peace of mind (and potentially save time and money) in the future.

Don Buehrer, Regional Director, Nelnet Partner Solutions

Don Buehrer, Regional Director, Nelnet Partner Solutions

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