IT’S EASY TO GET overwhelmed by the number of documents we receive over our lifetime. Paper copies take up space, and even electronic records necessitate computer storage. Either type requires a certain amount of time spent organizing.
The sheer volume makes the question of how long to retain records a perennial topic for newspapers, social media and podcasts. For instance, many folks have heard the advice that they should retain all documentation for seven years after they file their taxes. That’s sound advice when dealing with the IRS.
But there are reasons you might want to keep documents for more than seven years. The recent experiences of two friends illustrate why some records should be kept for far longer.
Tom—not his real name—was served with divorce papers after a long marriage. As he and his wife were working through the settlement, they were determining what assets they had acquired jointly and what each had brought to the marriage. Tom was trying to figure out the value of a 401(k) from 20 years ago, before they got married.
Over the past 20 years, the plan had three different administrators. None retained records from that era. I certainly can’t blame them. Each probably kept records for a few years, and then deleted them once they were no longer the plan’s administrator.
Tom was left to estimate the value of the 401(k) from decades ago. Unfortunately, his spouse had a different estimate. It took some emotionally draining meetings to reach an agreement.
Another friend—let’s call her Barbara—had once worked for a company and been there long enough to accrue a small pension. Every couple of years, she checked what the pension would pay upon retirement. Because Barbara’s salary and years of service were fixed once she left that employer, the estimate from the administrator never changed. Until this year.
Her old employer changed pension administrators. When Barbara checked on the pension amount, the new administrator gave an estimate that was one-third less than that of the previous pension administrator.
Barbara is now trying to gather records showing what she earned at that employer between 2002 and 2007, since those years of salary will determine the size of her pension. Unfortunately, she had thrown out her old W-2s and pay stubs because she had long ago filed taxes for those years.
My two friends’ experiences provide some justification for my habit of keeping many documents for far longer than seven years. Let’s face it: We never know when we might need some financial numbers from the distant past.
I work in the retirement industry, usually with employers, and am the kind of person who might be on the hunt for Tom’s old 401(k) papers. The conclusion I came to years ago regarding how long to keep records for defined benefit plans was…forever. It’s pretty much the same with defined contribution plans like 401(k)s. You don’t want some former employee asking for a payout, you know you paid him out 20 years ago, but you have no documentation of doing so.
I changed my tax CPA and I had very old records I had saved and the new one would had a way to set up the depreciation on a couple homes I had owned well over 10 years. Some things, tax records, I never toss.
Thanks for a good article on records retention. In my case, it’s a useful reminder to review what I’m keeping to ensure I’m not missing something.
Yep. Your article is a good summation as to why there’s no one right answer for everybody in regards to “how long we should store our documents” question.
As for your friends, “Tom”‘s only realistic option was locating an actual statement for his 401(k), which obviously didn’t happen. As for “Barbara”,she might try going to mySocialSecurity and download one of her earnings statements, and see if she can retrieve what she needs there. Unless it was a job in which she didn’t pay into Social Security, in which case that won’t help.
I just sold my house, and will need to be able to calculate my basis. Fortunately, I still have the closing statement from when I bought it, 33 years ago, and receipts for the major repairs/renovations. But I rely on Quicken (backed up on a thumb drive) for most things.
For many people selling their homes the 1099-S the closing company issues to the seller is typically a substitute form incorporated into the closing document where the seller does not get a separate tax form beyond the closing document. The home gain exclusion under IRC 121 can eliminate taxable gain on a home sale for many taxpayers. For those who have owned their homes for decades having good cost basis records on improvements certainly makes determining the amounts for your tax reporting easier. For those who do not have the purchase documents the original contract price and date acquired may be available online at your county appraiser. Improvements basis is hard to come by without good records but the IRC 121 exclusion may make the taxable gain issue moot if the exclusion exceeds the gain when ignoring the basis of improvements.
For a taxpayer who inherited part or all of their home from a spouse the tax basis is typically fully or partially stepped up to a fair market value on the date of death of the first spouse to die which can make original cost basis partially or totally moot. The amount of the step up may be and usually is different in community property states (full step up) and non community property states (partial step up). IRS Pub 523 has guidance on reporting your home sale, when the exclusion applies and the exclusion amount based on your circumstances. My experience is few surviving spouses get an appraisal of their home when their spouse dies unless there is a relatively quick sale of the home or an estate tax return will be due where the home value is needed.
Proper reporting the home sale and gain exclusion on your 1040 in the year of sale should help eliminate needless correspondence with the IRS when/if the government does a matching with the 1099-S data that likely was sent to them electronically. Such matching typically occurs years after the sale.
I strongly encourage all 1040’s to be filed electronically to avoid possible input errors by the IRS when they receive a paper return. You the taxpayer will have to deal with any issues if the IRS makes an error inputting your paper return. If you are expecting a over payment refund those refunds are typically issued quicker when you file your 1040 electronically.
Best, Bill