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We live in a world that generates a blizzard of documents related to our financial lives. But what should you do with all of these documents? In many cases, you'll need to hang onto them for a certain period of time.
To store your financial records, make both physical and digital copies of important documents like tax returns and wills and store them in a secure place. Here are five ways to make sure your financial records are stored properly and safely.
1. Take Inventory of Your Financial Records
So, you're staring at a stack of financial records that are scattered around your kitchen table or are taking up space on your computer. Before doing anything else with them, figure out which documents you have and how long you should keep them.
Federal tax returns likely are one type of document that you're wondering about. In most cases, the IRS recommends keeping records for three years from the date you filed your original return or two years from the date you paid taxes, whichever is later, if you file a claim for credit or refund after filing your return. Under several other scenarios, you may need to keep federal tax returns even longer.
Even if you're not concerned about being audited, you might need these documents if filing errors are eventually discovered or some other tax issue requires you to access the records.
Aside from tax returns, related records you should keep for at least a couple of years include:
- W-2 forms, 1099 forms and other records showing proof of income
- Canceled checks, sales receipts, credit card receipts and any other proof of payment that backs up tax claims or deductions
- End-of-year statements from banks, investment firms and other financial services providers, such as savings account statements and IRA statements
- Property records connected to a home or investment property you bought or sold
Generally, the IRS can audit returns filed within the prior three years. The IRS can reach back further if significant errors are discovered, however. Usually, though, an IRS audit goes back no more than six years, and only in specific circumstances, such as if the IRS suspects that you underreported your gross income by at least 25%.
What follows are some of the other financial records that you should store, either temporarily or permanently, in a paper or digital format:
- Will and other estate planning documents: This includes a durable power of attorney, if you have one.
- Social Security card: Your Social Security number is used for many purposes, such as applying for credit cards and loans. You should always hold onto your Social Security card.
- Important record-keeping papers: Including adoption papers, marriage licenses and divorce decrees, as well as a death certificate of a spouse or partner. Each of these documents might be needed for financial transactions.
- Loan documents and statements: These should be kept until the loan is paid off.
- Proof of property ownership: For example, a deed or proof of a paid-off mortgage.
- Other property-related papers: Including property tax records and receipts for a home purchase or a home improvement project. These should be kept for at least three years after the due date for the tax return that includes the income or loss on a house that you've sold.
- Vehicle titles: These should be kept as long as you own the vehicles.
- Insurance documents: These include your life insurance policy, health insurance policy, Medicare cards, homeowner's insurance policy and appraisal documents and purchase receipts for valuables such as antiques and jewelry.
- Statements from crucial accounts: Copies of utility bills, IRA and 401(k) statements, brokerage statements, bank statements and credit card statements should be kept. A lot of the records can be shredded after one year unless they've been used for tax deductions. Quarterly statements for retirement accounts should be kept until you get the annual statements. Hang onto those annual statements as long as an account remains open.
- Paid bills: Once you have proof that a bill has been paid (such as a bank statement showing the bill payment), you can shred the bill.
- Pay stubs: Keep pay stubs until you receive your W-2 at the end of the year. After that, you can properly dispose of the pay stubs.
2. Scan Important Paper Documents
You might want to scan some of your important paper documents. But how do you decide? Here are some of the records you should consider scanning and storing, in case you lose the originals. All of these documents are critical to your financial life.
- Social Security card
- Driver's license
- Birth certificate
- Marriage certificate
- Divorce decree
- Insurance policies
- Health insurance cards
- Property deeds
- Vehicle titles
- Will and related documents
- Tax returns (typically for the past three years)
Ideally, these paper documents should be scanned using a computer, mobile device, scanner or photocopying machine and stored digitally. It's wise to retain the paper documents in a safe location in case the digital copies are somehow compromised.
3. Encrypt Digital Records
These days, many of us save financial records digitally. While this is a convenient way to store documents, you must make sure they're stored securely.
To safely store digital records, you should keep them in encrypted folders on your computer or other digital device. Encryption encodes a file so that only authorized people can access it. Generally, you need a unique password to gain access to an encrypted file. This makes it harder for cybercriminals to steal your information.
Both the Windows and Mac operating systems provide encryption capabilities. Third-party encryption software also is available. Among the free encryption software options are AxCrypt, Folder Lock and VeraCrypt.
An alternative to traditional encryption of your computer files is cloud document storage. This method stores files online through third-party cloud servers, freeing up space on your computer. Cloud servers are encrypted. Options for cloud storage include Microsoft OneDrive, Google One and Dropbox.
4. Store Hard Copies Safely
Just as you should securely store encrypted digital copies of financial documents, you should securely store paper versions.
One option for storage of hard copies of documents is a fire-resistant home safe that can be opened with either a key or a combination lock. Ideally, the safe should be bolted to a floor or wall or tucked away in a hard-to-find spot. A home safe allows access to documents when you need them right away.
An alternative is a safe deposit box that you rent at a bank. The bank restricts access to a safe deposit box to only those people who have a key to open it. One drawback is that you can't take anything from a safe deposit box when the bank is closed.
A third option is a metal filing cabinet that can be locked or unlocked with a key. While a filing cabinet, like a home safe, is easy to access, it's also the least secure choice among the three main options. So, you can quickly pull files from a filing cabinet—but so can a thief.
5. Properly Dispose of Identifying Information
Once you're sure that you've kept important financial records long enough, don't just toss them into the trash can or a recycling bin. Instead, these records should be shredded, either at home or at a business that provides shredding services. If these records end up in the wrong hands, someone could use your personal data to steal your identity or commit other crimes.
The Bottom Line
Proper storage of financial records is critical to protecting your identity. Fortunately, several methods are available to prevent your records from being used to defraud you. To further shield your information from the wrong people, try Experian's identity theft protection tools.