Wednesday, February 3, 2010

Keep some financial records, but not all

Each week, we take a question from a reader. This week's question concerns financial paperwork - much of which is coming as a flood into our mailboxes right now. If you have a question, please post it in the comments section.

QUESTION: I spend most of January going through my files and pitching files I no longer need. But there are some financial records that I haven’t been able to bring myself to get rid of. I have statements from a credit union I had an account with 15 years ago. Do I need those? Do I need carbons from old checkbooks, or account statements for retirement accounts that have since been closed and merged with other accounts? How long do I keep this stuff?

ANSWER FROM DAN DANFORD: Financial records are a common frustration. The main reasons to keep anything is to prove your tax return, or in the case of receipts, any warranties that apply to items you buy. After that, they have no real purpose except clutter for your kids to sort decades from now. The general rule on tax income and expense information is three years, and most product warranties expire long before that. In the case of credit union or bank statements, keep them for a few years to prove any claims to the IRS or manufacturers. Not much use beyond that.

I also tell people to toss interim statements. Once you have the December 31 summary bank or brokerage statement, you likely don't need all the rest of that year. Shred it!

Do not destroy confirmation statements for the purchase of stocks, securities or property. For many other tax purposes, historical cost is very important. You may sell something next year that you bought 20 years ago, and that will show up on your tax return. You'll need to prove that cost if you are ever audited. In our firm. we keep security records for our clients, so they don't have to. But, if you do-it-yourself, those cost records are important and you need to keep them. Among the worst I ever see, are long-term holdings in bond mutual funds where the monthly dividends are re-invested. Whew! Keep those annual statements until you sell the fund.

Truthfully, we all keep more than we need and it clutters our life.

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