In meeting last month’s tax deadline, you may have discovered that the filing system for your financial records isn’t as organized as you thought. Whether it involves business or personal documents, most everyone can use an organizational refresher course now and then.
Orderly records always make life easier. Besides saving you countless hours — and frustration — looking for canceled checks, receipts and other documents, there are other reasons to tackle the paper load. For example, you may suddenly need to find a warranty on a piece of equipment. Or you may need to get a passport and can’t find your birth certificate.
The effort it takes to get and stay organized is a small price to pay for the end result. But here’s a word of caution — don’t get over zealous when the urge to clean strikes. Take time to sort through your personal and business papers before discarding any information. Knowing which items are useful and which are useless — (and how long to keep certain records) is critical to getting your financial house in order.
At a minimum, you should hold on to copies of bills that support income and expenses for three years after the due date of each tax return. Included in that category are such documents as W-2s, showing salaries and tax deductions, K-1 partnership returns and 1099s, showing dividends and interest. You also should save canceled checks in case the Internal Revenue Service questions deductions such as those for charitable contributions.
The IRS audits only a tiny fraction of the millions of returns filed each year; and it normally doesn’t audit returns more than three years old. However, if the government suspects that there is a “substantial understatement of tax liability” — more than 25 percent — the IRS can extend the time for an audit up to six years. There is no time limit if the IRS suspects fraud or when no return has been filed at all. What better reason to keep tidy and accurate records? Without supporting papers, you may have a hard time proving your case — and any deductions that you can’t prove may be disallowed.
There are some documents that you should never throw out. For example, you should keep copies of brokerage statements and mutual-fund transactions forever. They will enable you to determine the basis, or cost, when you sell securities or redeem mutual-fund shares. It could be your advantage to be able to identify which shares you sold and which shares of a particular security you bought at different times. If you lack the data to back you up, the IRS will take a first-in, first-out approach.
Hold on to any records you may need to support the cost of other investments or assets. If you contributed to an Individual Retirement Account or a Keogh plan, save the statements until all funds have been withdrawn.
Taxes aside, certain personal records, such as birth and marriage certificates should be kept indefinitely, and they’re best placed in a safe-deposit box. Other documents that fall into that category are trust agreements, your power of attorney, and pictures of any valuable items that you would need as proof for insurance purposes in the event of a loss.
The one document that does not belong in your safe-deposit box is your will. Keep it in a safe place, such as a fire-retardant strong box, and leave a copy with your lawyer and/or a trusted friend or family member. Putting a will in a bank can cause problems if you live in a state where safe-deposit boxes are automatically sealed when the owner dies.
There are several places where you can find detailed lists that outline which financial documents you can throw away immediately, which ones to keep for 1 year, 5 years, forever. An Internet search could start the process, but also check with your banker or financial advisor, they likely have a list to offer.
Finding what you need when you need it doesn’t have to be a chore. But it does require some work to keep documents updated and organized. Also, don’t be afraid to re-invent your filing system, you never know when you may find a better way to manage this task.
This column is produced by Financial Planning Associates, and is provided by R.Hutton Cobb, a Wachovia Securities financial advisor in Greenville, N.C.