It might be spring cleaning, or just the urge to destroy something after I finish filing my taxes, but one of my chores each year involves getting rid of the excess paperwork that invades my financial life. This year, however, that ritual changed. After talking to enough experts, it has become clear that spring cleaning is no longer about making sure a paper bomb doesn’t explode all over your home office, but that a document/password implosion doesn’t occur in your online and electronic world.
While getting rid of or changing electronic data doesn’t have the same visceral thrill of shredding the enemy into little bits, it’s a challenge that most consumers need to take on, particularly in light of the Heartbleed bug, which taught us that threats can be sudden, even if initial scares over how much data is vulnerable might be overblown.
Most people keep too much paperwork/information around because they don’t know what to get rid of and don’t have a plan to trim the excess. Here’s my plan, as I expect to execute it this weekend when I put the new tax return into the files and remove most of the junk that doesn’t have to be there.
Unless you’re filing fraudulent returns — for which there is no statute of limitations — reduce income tax returns into several stacks of paperwork
Old tax returns — especially those covering the purchase or sale of property — can be important for compiling future returns, possibly decades into the future. Thus, keeping the return documents in perpetuity is prudent, though not necessary when returns are decades old and several residences in the past; most tax preparers keep copies of your documents for the life of your advisory relationship, so you may have back-up there too.
“Support documents” — the receipts, bills and tax forms on which you based your tax math — must be kept for three years after a return is due. Thus, when this year’s return hits the filing cabinet, purge the bulging pile of stuff from the 2010 return (filed in 2011, so the three-year holding period has passed).
If you have multiple sources of income and want to stay ultra-cautious, keep forms related to income (like 1099s and W-2 forms) for six years, the time the IRS has to challenge returns on which it believes gross income was underreported by 25% or more.
Due to rules changes phased in since 2011, brokerage houses now provide cost information on stock purchases, mutual funds, options, bonds and other securities.
Don’t be too quick to shred old trading confirmations, however. Financial-services firms had to establish/maintain records beginning the year the rules went into effect (so 2011 for stocks, 2012 for mutual funds, etc.). Some firms don’t have data on purchases made prior to the rules; some firms work with consumers to build records from the past, so that their accounting reflects the papers you saved, at which point the firm’s numbers can be considered reliable.
Until you know the firm’s records are correct and complete, keep your trade confirmations.
Do, however, shred investment papers you don’t need. Year-end statements show all transactions for the year, allowing you to discard all monthly/quarterly documents except that year-ender. Your files get a lot slimmer when your annual activity is summarized on one paper.