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Paper Chase

Ross Menke  |  January 11, 2019

IF YOU’RE GOING to form one new financial habit this year, make it good recordkeeping. A system that’s easy to follow will improve your financial life both today and for years to come. With all of the annual investment statements and tax documents you’re about to get, this is a great time to start.

Whenever I go to my mailbox, I’m on the receiving end of countless advertisements, credit card offers, insurance notices and more. It can be a challenge to figure out what’s important and what can be thrown away. The recordkeeping system I’ve implemented makes this decision-making process easier.

I have three buckets that my personal and financial documents go into. These buckets vary depending on the importance of the information and legal requirements associated with them. I don’t keep these documents in actual buckets, as you might imagine. Instead, documents are stored in different ways, depending on their importance.

1. Forever documents. Your passport, birth certificate, Social Security card, property deeds, car titles and marriage certificate all fall into this category. Financial and estate documents to keep forever include wills, powers of attorney, tax returns, life insurance policies and any legal filings. The general rule: If it’s difficult to replace, keep it safe.

Also keep your Roth IRA contribution history. The annual contributions you’ve made to your Roth IRA can be withdrawn at any time tax- and penalty-free. You want to keep track of how much you’ve contributed, as that may be difficult to remember 20 years from now. In addition, if you have a health savings account, keep your medical receipts. Funds in your HSA can be withdrawn tax-free with proof of past medical expenses—even if those expenses occurred years earlier.

2. Supporting tax materials. The IRS recommends keeping tax-related information for three to seven years. This includes all of the information used to complete your tax return, including W-2s, 1099s, K-1s and proof for the deductions you’re claiming. You should keep these records indefinitely if you don’t file a return or file a fraudulent return.

Have documents that the IRS no longer requires? Before discarding them, make sure you don’t need them for an insurance claim or a dispute with creditors.

3. One-year documents. This section includes most monthly financial records: bank statements, credit card statements, utility bills, pay stubs, and internet and phone bills. All should be reviewed for accuracy when they’re received. If you need any of them to claim a deduction for business purposes, keep them with your tax documents. Otherwise, feel free to discard after a year.

A final suggestion: Be sure to properly store documents. Take extra care with items you need to keep for a long time. Consider a safe deposit box at your local bank or a fireproof safe at home. To protect yourself from a potential burglary, consider hiring a contractor to physically secure your safe to your home.

What about the documents you can now destroy? Think about buying a cross-cut paper shredder to destroy the information. If you need to rid your home of a large number of documents, you can likely find a commercial paper shredding business in your hometown.

Ross Menke is a certified financial planner and the founder of Lyndale Financial, a fee-only financial planning firm in Nashville, Tennessee. He strives to provide clear and concise advice, so his clients can achieve their life goals. Ross’s previous blogs include Start SmallNever Retire and Starting Young. Follow Ross on Twitter @RossVMenke.

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