Which financial tax records should you hold on to and for how long? The answer is important for a variety of reasons. First, if you keep too much paper it becomes hard to organize and ultimate find documents when you need them. And if you destroy records too early you could end up on the losing side of a tête-à-tête with the IRS. Either approach has its problems.
We’ll discuss how long to keep your documentation, but before we do it’s important to keep one thing in mind. Don’t assume the government keeps records to prove your case. It’s true that they have tremendous resources and systems (they even have the NSA at their disposal). They can claim you owe them anytime they like. But when it comes to records that show you actually don’t owe them anything they suddenly become incompetent. The problem is that you’ll end up paying interest and penalties if you can’t prove your case during an audit. So how long should you hold on to tax records?
According to the IRS, you need to keep your supporting documents for three years after the date your return was due. But before you fire up the shredder, keep in mind that the IRS can go back six years if they suspect you underreported your gross income by 25% or more. And don’t get too comfortable with that either. The IRS can come after you forever if you file a fraudulent return or don’t file one at all.
The best rule of thumb is to hold on to your supporting documents for 7 years. And keep your tax returns forever. When it comes to records to prove your cost basis for securities and real estate, your best bet is to hold on to those forever as well.
Does this mean you have to hold on to all your monthly investment statements and confirmations forever? Of course you should check with your own tax professional on all of this information but your annual 1099 and your transaction confirmations have all the information you need in my opinion. I also suggest that you get these sent to you electronically rather than receive the paper version. This makes it a snap to store and access the data when and if you need it.
If you own a business, it’s best to keep your employment tax records four years or longer after the employment tax was due.
When it comes to retirement accounts, always keep a copy of your beneficiary designation documents. I know from personal experience having worked at a bank that these get lost all the time. If that happens to you, it becomes a real nightmare. Just keep a copy of your beneficiary designations forever and you’ll never have to worry.
How long do you keep financial records? Do you store them electronically? Why or why not?