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Tax season is the perfect time to start culling your paper piles and computer files and getting everything in order. You've already delved into your financial records, so you might as well take the time to organize them.
There are plenty of good reasons to do this. One is that if you haven't yet completed your taxes, getting your paperwork in order will reduce tax-preparation stress. And if you have already filed your taxes, you'll want to know how long to keep tax records and other financial papers in case you're audited.
There are other instances when being organized can pay off. If you're meeting with a financial adviser or an attorney, you don't want to spend hours wading through clutter to find the documents you need.
If there's a fire, flood, or theft, you'll need access to essential documents quickly. And if you become ill, well-organized paperwork will make it easier for your loved ones to find your healthcare power of attorney, insurance policies, medical records, and outstanding bills.
So what should you do? Divide your financial papers into four categories: papers that you need to keep for the calendar year or less; papers that can be destroyed when you no longer own the items they cover; tax records (we'll tell you how long to keep tax records), and papers to keep indefinitely.
How to Organize Your Records
Keep for less than a year
In this file, store your ATM, bank-deposit, and credit card receipts until you reconcile them with your monthly statements. Once you've done that, shred the paper documents (to avoid ID theft) or securely trash electronic files unless you need them to support your tax return. Keep insurance policies and investment statements until new ones arrive.
Keep for a year or more
You'll want to hold onto loan documents until the loan is paid off. That will often be for more than a year. Then toss those papers. If you own one or more vehicles, hold onto the titles until you sell them. If you have investments in stocks, bonds, mutual funds, or anything else, keep the investment purchase confirmations until you sell the investment so you can establish your cost basis and holding period. (If that information appears on your annual statements, you can keep those instead.)
Keep for seven years
If you fail to report more than 25 percent of your gross income on your tax returns, the government has six years to collect the tax or start legal proceedings. So when it comes to determining how long to keep tax records—electronic and paper—we recommend seven years, just in case.
Essential records such as birth and death certificates, marriage licenses, divorce decrees, Social Security cards, and military discharge papers should be kept indefinitely. Also hold on to defined-benefit plan documents, estate-planning documents, life-insurance policies, and an inventory of your bank safe deposit box (share a copy with your executor or your attorney).
How to Store Your Files
- Use a fireproof safe or password-protected electronic file for the following: Bank and investment statements, estate-planning documents, pension information, insurance policies, pay stubs, tax documents, and your safe deposit box inventory list.
- Invest in a safe deposit box for papers that can't be easily replaced: Original birth and death certificates, Social Security cards, passports, life-insurance documents, marriage and divorce decrees, military discharge information, vehicle titles, an inventory of your home's contents (in case you need to make an insurance claim), and loan documents.
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