Retaining Personal Documents, Part 1: What Do I Keep and for How Long?

Throughout our experience at PFS, clients have periodically undertaken to sort through years—sometimes decades—of accumulated paperwork and personal documents, and they often ask for guidance on which documents should be retained and which can be shredded.  Clients may have different tolerances for keeping “stuff” versus risking a potential need for it down the line, but we offer some general guidance in Part 1 below on which documents to keep and for how long.  In Part 2, we will address the related question of where best to keep them.

What are considered important documents and how long should I retain them?

• Tax Documents.  At a minimum, you should retain tax returns and supporting documentation for three years from the date that they are filed since the IRS can include up to three years of past tax returns in an audit.  (The statute of limitations for state tax return audits occasionally differs from the IRS standard though.  For example, if you live in Arizona, California, Colorado, Kentucky, Michigan, Ohio, or Wisconsin, the statute of limitations to audit state tax returns is four years.)  However, if you misstate income, the IRS can look back 6 years, and there is no statute of limitations at all if a taxpayer has failed to file a return (and should have) or filed a fraudulent return.
  
  In practice, we have had occasions (as recently as last month) in which we needed to look back at client tax returns from 5, 10, or even 15 years ago to clear up confusion on a tax issue.  For example, we have tracked down previously filed Form 8606’s to demonstrate that a client has basis in his or her IRA, meaning that withdrawals from that account are not fully taxable.  In some cases, clearing up such issues has resulted in significant tax savings for the client.  We have also seen instances in which clients needed to submit evidence of old W2’s to fix issues with their earnings record for Social Security benefits.
  
  If you are eager to purge, you can always shred old tax returns (e.g. from 6+ years ago), and if you need to refer back to a specific return in the future, you can request a copy of the return (and all attachments, including W2’s) from the IRS.  However, if you are going to keep any category of documents for a longer period of time, old tax returns and the relevant attachments might be good ones to keep.

• Legal and Personal Identification Records.  The rule for this category is more straightforward.  Legal records such as birth and death certificates, marriage licenses, divorce decrees, Social Security cards, military discharge papers, and estate planning documents (e.g. will, trust, power of attorney) should be kept indefinitely.  For personal identification items, such as passports and driver’s licenses, just the current version needs to be kept.

• Bank and Asset Account Statements.  For most bank, brokerage, and retirement accounts, it is sufficient to just keep the most recent statement received (if any, since many financial institutions are moving to online statements).  This basically serves as a reminder to yourself (or as a notification to your heirs, if you pass away) of the assets that you have.  Financial institutions are required to maintain records of ownership, value, and transactions for the accounts that they manage, so you can always request that information from them (or simply access it online).  Since 2012, they are also required to maintain cost basis information (i.e. details on the price/amount/date of shares bought and sold) for stocks, mutual funds, and exchange traded funds.  If you hold investments in a non-retirement account that you purchased prior to 2012, you may need to keep old statements for the purpose of proving cost basis to determine your tax liability when you sell it.  If, however, you do not have a taxable investment account—or only hold investments in it that you have purchased since 2012—keeping old statements is generally not necessary.
  
  For retirement accounts, you may want to keep year-end statements through the following year if you are over age 72, in case you want to use your year-end balance to check the amount of your required minimum distribution (RMD) for the following year.  Also, if you have made any non-deductible contributions to an IRA, you should keep record of those contributions unless/until you are certain that they have been properly reported on your tax returns over the years via Form 8606.

• Property Ownership Documents.  In general, for tangible property like cars or homes, it is advisable to keep record of ownership—such as deeds, titles, settlement statements, plats, or bills of sale—until you sell the property.  For a home, you should also keep record of capital improvements made over the years.  An addition or renovation that adds value to your home may increase your cost basis in the home, potentially reducing your tax liability when you sell it down the road.  (Note that you may not have received a physical deed or title to your house when you bought it at closing, but those documents are part of the public record, and you can obtain a copy from the property records office in your county if you really want one.)
  
  For those who still receive paper utility bills, there is no need to keep such bills once you have ascertained that they are correct and paid them.  If, however, you deduct some of your utility expenses on your tax return—e.g. in connection with the home office deduction—then you should keep them with the supporting documents for that year’s tax return.

• Liability Statements.  For documents pertaining to debts (e.g. car loan, student loan, mortgage), it is important to keep those that establish the terms of the debt (e.g. principal, interest rate, term) until the debt is paid off.  If you receive paper monthly statements, you may just want to keep the most recent one as well as any documents substantiating interest payments that will be deducted on your taxes.  Once the loan is paid off and you receive a payoff statement, keep that final statement forever just in case, in the words of Consumer Reports, “some zombie debt comes back to haunt you.”

• Healthcare Documents.  The three main reasons to keep healthcare documents would be 1) if you itemize deductions and claim a deduction for medical expenses on your tax return, 2) if you draw—or plan to draw—from an HSA account to reimburse yourself for past medical expenses, or 3) if you are filing or disputing a medical insurance claim.  In the first case, healthcare documents would be included as supporting documentation for that year’s tax return and therefore should be kept for 6+ years.  In the second case, to err on the safe side, you should keep receipts for all medical expenses from the years in which the HSA is open.  Once the HSA account is closed, you can discard the receipts after the 6-year window from the last tax return in which contributions to and/or distributions from that HSA were claimed.  In the third case, the documents can be discarded as soon as the insurance claim is paid and resolved.
  
  If you are eligible for Medicare but still have prescription drug coverage through an employer, you may also receive a Notice of Creditable Coverage on an annual basis.  We recommend keeping this document since it may be useful in avoiding a late enrollment penalty if you file for Medicare Part D down the road.

Sorting through old documents can be time consuming, but hopefully it is also a satisfying process as you organize, simplify, and make it easier to find documents that you may actually need in the future.  This undertaking is a huge gift to your heirs as well, who will be faced with the task if you do not take care of it first.  If you have any questions about the guidelines mentioned here—or about any categories of documents not mentioned—please call or email any time.  And for our local clients, please note that we have a professional shredder in our office, which you are welcome to use in pursuit of organizing and simplifying!