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.
Pay Stubs, Bank Statements, Canceled Checks and Consumer Bills/Receipts
Your last paystub is useful for cross-checking your employer’s tax reporting, getting the value of donations made through payroll deductions and, depending on circumstances, recording the amount of money you paid for health-care coverage; all the rest — provided you got what you are entitled to and there are no disputes with your employer — have no value whatsoever.
Canceled checks today generally are mini images on a bank statement. You don’t need to keep records showing that you bought groceries or made a co-pay at the doctor’s office in 2010 or, worse, 1997. You should have clipped images with tax ramifications — charitable contributions, mortgage or tax payments, home improvements and the like — making them part of your support documentation. Once you clip those few images and balance your checkbook — or, more likely, just accept what the bank says about your account — shred the rest.
Old credit-card statements, utility bills, department-store and service-station charge card bills and the like also get shredded in most circumstances. Anything covering tax-deductible expenses — like your electric bill if you have an office at home and deduct utility costs — gets treated like a support document. If you used a credit-card to pay for home-improvement expenses — which have tax implications — you’ll want to squirrel that record away for use when you sell the home someday.
Be aware of special situations, from buyer-protection plans or warranties — where a record of the purchase date is important — to the notion that in divorce cases, records may be important in determining who pays the child’s expenses and can claim the child as a dependent on tax returns. Keep bills on which there were disputed charges, fraudulent card use or other problems — along with notes on how and when those issues were resolved — just in case any negative information from the incident shows up on your credit report.
Documents Stored on Electronic Devices
The rules here are the same — don’t keep things you don’t need — but also be sure your platform is secure. “A lot of people now use apps where they take pictures of documents with their smartphone and it scans them, and they store the documents, but they still have the pictures on their smartphone,” said Becky Frost, senior manager of consumer education, Experian Consumer Services. “You may not worry about clutter the way you do with paper documents, but you do have to worry about safety and identity theft.”
Consider this spring maintenance rather than “spring cleaning,” but several surveys have shown that at least two-thirds of people never change passwords or use one password for all accounts.
You not only want to change passwords, but have strong ones. And, as Frost noted, if you have “security questions” on your account, pick the questions wisely and make sure the answers are not readily available on your social media accounts; your mother’s maiden name may be easy to remember, but if Mom is a Facebook friend, her name might be easy for someone to find if they grab your phone or access your information. The same goes for your dog’s name, the high school you went to, your wedding anniversary and more; a little protection and forethought goes a long way to give your files — paper and electronic — a worthwhile makeover.
Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers. Follow him on Twitter @MKTWJaffe. This article originally appeared on MarketWatch.com and is reprinted by permission from Marketwatch.com, 2014 Dow Jones & Co. Inc. All rights reserved.