Year's End Financial Clean Up – Which Documents Do You Need To Keep

Whether paper documents are filling up your drawers or rotting away inside a box in the garage, you may be wondering which documents you need to keep and what you can shred or otherwise dispose of. Keep reading for some guidance on what you need to save.

If you are unsure of whether you need to keep a document or receipt, I'm a big fan of scanning them and saving them in the cloud. This gets the paper out of the way without getting rid of a document you may need at some future date. Not to mention, most of the time, finding a scanned document is much easier than digging through boxes in the garage.

Bank Statements and Investment Account Statements

When I first started as a financial planner back in 2003, most people received paper statements in the mail. Many of those statements ended up in boxes or drawers, never to be looked at again. Today, I'd recommend you see how far back digital statements are viewable on your investment or banking portals. Typically, I like to keep year-end statements for investment and retirement accounts . Beyond that, online portals should have been sufficient for most other transaction needs. For a bank account, assuming you have checked your online activity or monthly statement for a fraudulent charge or missing deposits, access to an online statement should be sufficient.

The big exception here is those who may need to apply for Medicaid in the next few years. You will likely need to keep five years of statements for all assets. In this scenario, that would include all bank and investment accounts.

Credit Card Statements

You should check your credit card statement carefully each month. It still amazes me how often people find fraudulent charges. Beyond that, you may be shocked at how much you spend at certain locations.  However, unless you need to keep the credit card bill for proof of payment or tax-deductible expenses, there is no reason to keep statements from month to month.

Most credit card companies keep old bills available for one to two years. You likely could access older bills with a little more leg work. If you made a large purchase that is covered by an extended warranty from your credit card, hold onto the bills longer. Similarly, if you are taking tax deductions based on items charged to the credit card, follow the tax document rules below.

Tax Returns and Supporting Documentation

The IRS has seven years to audit your tax returns . You should keep all tax records, tax returns, and supporting documents. Before you get totally annoyed at this, you don't need to keep hard copies that take up space in your home. Simply scan everything. You will have it if you need it, and you won't even notice it is there if you don't. Just make a tax file on your computer or cloud drive and save files by year.

How Long to Keep Medical Records

During COVID, we received bills for medical care delivered more than a year ago. The more you move around or go from doctor to doctor (or insurance to insurance), the longer you should hold onto records. At the bare minimum, keep all records from a treatment or doctor visit until final payments have been made and you are sure you aren't going to be charged further. These days one office visit can result in multiple bills if testing is done, etc.

For more serious illnesses or ongoing treatment, you may want to keep records longer.

Home Improvements

For homeowners in expensive markets, tracking home improvements can be a big tax saver. When you sell your home, you can reduce the taxes owed by tracking improvements to your home that increase the cost basis. Keep a running list of improvements made, how much you spent, and receipts. This could be decades of expenses for those of you who have lived in a home for a long time.

Homeowners won't owe taxes on the first $250,000 ($500,000 if married) of gains on the sale of their homes, but with today's red-hot real estate markets, many homeowners will have made more than that. Tracking home improvements will help limit the taxes owed when you eventually sell.

When in doubt, scan it, and save it somewhere you will be able to find it later. Better to have the document/receipt when you need it.

By David Rae, Contributor