Financial Documents: What to Keep and What to Throw Away?

There's no denying that we're living firmly in the digital age, and the way that we handle financial documents has shifted dramatically over the last decade or so. While digital records are becoming more prevalent, it's still vital to understand which paper documents need to be retained and for how long. If you're ready to nail down the essentials of document management, here are some tips to help you responsibly declutter.

Bank Statements and Receipts: Paper or Digital?

As online banking and digital financial tools continue to take center stage, you're likely wondering if keeping physical copies of bank statements and paper receipts is still necessary. Here's what you should consider before deciding on what to keep, and what to throw away.

• Bank Statements: Most financial institutions provide access to digital statements which are acceptable for most legal and tax-related purposes. However, if you’re involved in a mortgage application or other financial process, you may be required to provide paper copies. Typically, keeping bank statements for at least one year is advisable, but for important transactions related to home purchases, renovations, or large investments, keep these documents for at least seven years.
• Receipts: For everyday purchases, digital copies are often sufficient unless the receipt is needed for warranty or tax deduction purposes. For major purchases (like appliances, electronics, or business expenses), keep the physical receipts for the duration of the warranty period or for tax filing.

How Long Should You Keep Other Financial Records?

The length of time you should retain financial documents can vary depending on their purpose:

• Tax Returns and Supporting Documents: The IRS recommends keeping copies of your tax returns and any documents supporting tax deductions for at least three years from the date you filed your original return or two years from the date you paid the tax, whichever is later. However, if you’ve underreported income by more than 25%, keep your records for at least six years.
• Home Purchase and Renovation Records: Keep these records for as long as you own the property plus at least three years after you report the sale on your tax return. This duration helps prove your capital gains or losses calculations during any possible audits or tax reviews.
• Investment Statements: Keep these as long as you own the investment, plus seven years for tax purposes.

Digital vs. Physical Document Storage

While digital storage is convenient and reduces physical clutter, it's essential to maintain backups and ensure your digital documents are secure. Use encrypted storage solutions and maintain physical copies or backups for exceptionally important documents. Regularly update your storage protocol to align with technological advancements and best practices regarding security.

Essential Paper Documents to Retain

It's worth a mention that there are a few 'official' documents which should always be kept in physical form due to their legal and personal importance. Though they are not considered financial documents, per se, but are sometimes required for related matters. You may not need to present these paper documents often, but they are foundational for establishing and proving your identity in cases where digital copies are not acceptable substitutes for the originals.

• Social Security Cards: Always keep your original social security card in a secure place, such as a safe deposit box or a fireproof safe at home.
• Birth Certificates: Original birth certificates are crucial for verifying identity and should be stored safely alongside other vital documents, such as your passport. 

Keeping Your Documents and Financial Plans in Order

Managing your financial documents effectively requires a balance between retaining necessary records and minimizing clutter. By understanding what needs to be kept and for how long, you can ensure that you’re prepared for future legal, financial, or tax inquiries.

Myrick CPA can help you plan ahead with expert financial advice, including a thorough review of your financial records and advice on a document retention system. Contact us to arrange a complimentary initial consultation.