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MONEY'S WORTH

Is it OK to toss out financial records?

Now that tax season has ended and many people have sorted through their financial statements, I often get questions from clients about how long they need to keep financial records. Here is a general overview to help you “detox” your financial paperwork.
Tax returns: In general, you should keep the last seven years of tax returns and all supporting information. The IRS has three years from a filing date to audit your return and you have three years to amend your return if needed. The IRS does have six years, however to challenge your return if it suspects you underreported gross income by 25 percent or more.
IRA contributions: Most custodians are pretty good at keeping track of your contributions, so you may only need to maintain five years or so for conventional traditional IRA accounts. However, if you make nondeductible contributions to a traditional IRA (where you’re mixing tax-deferred and post-tax contributions) you’ll need to keep permanent records to prove you already paid the tax on the post-tax contribution amounts.
Retirement accounts: Keep the quarterly or monthly statements for the year, then when you receive your annual summary statement, you can shred the quarterly or monthly statements, as long as the annual summary statement contains all the transactions for the year. You should keep your annual statements until you retire or until you close the account.
Brokerage accounts: Generally, you should keep the monthly statements for one year and the annual statements permanently for tax purposes to document your cost basis on your investments.
Bank records: Any copies of checks that have to do with business expenses, home improvements and mortgage payments might be kept separately with tax or house/mortgage records after one year. The rest can be shredded after a few years if there are no long-term records needed. If you close a bank account, keep those records for a few years as well, just in case.
Credit card statements: For non-tax related expenses, shred statements after three years. For any statements with tax-related expenses, keep for seven years with your tax returns.
House expense records: For expenses relating to home improvements, remodeling or new installations, you will want to keep these permanently or until you sell your house. This is because such expenses affect the cost basis of your house property which as tax implications. Permanent improvements such as an addition or refinishing the basement, for example, may add to your cost basis and lower the capital gains tax liability when you sell the property (aside from the capital gains shelter that primary residence owners have).
If all of this sounds burdensome, you might invest in a scanner and keep your records electronically. With today’s technology, it’s amazing how much information can be stored on a disc or USB drive so those stacks of statements don’t have to take up room in your closet or office drawer anymore.
Kevin Worthley is an investment adviser representative of Wealth Management Resources Inc., a registered investment adviser. The opinions expressed above are his only and sources used for this article may be deemed reliable, but cannot be guaranteed. He can be contacted with questions or comments at 356-1400.
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