Hold On Loosely, But Don’t Let Go!

US Wealth McCarthy |

Document Retention:  What to hold on to and when to let go

The song “Hold on Loosely” was released in 1981 by the band 38 Special, peaking at #27 on the Billboard charts in May.  But the lyrics live on into 2019 as they apply to the recommendations for records retention that most of us should follow.

Each year during this time, we are asked about the length of time various records must be maintained.  Discarding records too soon can create tax or legal problems if you cannot produce the evidence to support your claim or tax deduction.  Keeping reports too long, however, wastes precious space and resources.

For individuals, the statute of limitations period for income tax returns is generally three years. It is six years if there is a substantial understatement of gross income. A good rule to thumb is to add a year to the statute of limitations period. Using this approach, taxpayers should keep most of their income tax records a minimum of four years, but it may be more prudent to retain them for seven years. You will know if there are potential issues with your return that will require the longer holding period. Remember, if you cannot produce evidence of a deduction for your tax return, the IRS can and will disallow it!

Regardless of the tax periods, individual taxpayers should retain certain records for longer periods, and in some cases, indefinitely.  Tax returns, results of an audit by a tax authority, general ledgers, and financial statements should normally be kept indefinitely.

Record retention for a business is different from that of an individual.  The company’s policies and the type of files will dictate the length of time for retention.  In creating a records retention policy, businesses must factor in the statute of limitations for breach of contract, breach of fiduciary duty, and professional liability claims.  Generally, files should be kept as long as they serve a useful purpose or until all legal and regulatory requirements are met.  The statutes vary by state, so be familiar with the requirements of each state in which you do business.

The suggestions below are merely guidelines.  You should consult with your attorney and insurance carrier when establishing a record retention policy or your favorite tax preparation firm/CPA for tax retention questions.

We recommend reviewing your record retention policy annually and updating it as necessary, considering changes in governmental and professional requirements and the cost of retaining records.  The IRS does permit taxpayers to store certain tax documents electronically.   Although aimed primarily at businesses and sole proprietors, they presumably apply to individuals as well.  These rules permit taxpayers to convert paper documents to electronic images and maintain only the electronic files.  The paper document can then be destroyed.  Certain requirements must be met to take advantage of an electronic storage system.

 And, don’t forget to heed our recent advice about protecting your personal information from identity theft!

 Keep Permanently (Don’t Let Go):

Birth and Death Certificates

Detailed List of Financial Assets Held

W2 Forms Received

Military Records

Photos or Video of Valuables

Medical Records

IRA Records

Tax Returns & cancelled checks for tax payments

Property Ownership Records (major improvements/maintenance)

Alimony, Custody or Prenuptial Agreements

Hold On Loosely (Keep for 7 years):

401k/Keogh statements

Annuity Year-End statements

Certificates of Deposit Statements

Forms 1099 Received

IRA Statements (deductible and non-deductible)

Insurance Policies

Investments/Sales of Stocks & Bonds

Loan Records/Forms 1098

Major Purchase Receipts

Keep for 3-6 years:

Bank statements (3 years)​

Cancelled checks

Real Estate Documents (3-6 years after property is sold and taxes paid)

Keep with Applicable Tax Return:

Employee Business Expense Reports

Medical Expenses

Keep for One Year:

Pay Stubs--Discard all but final, cumulative pay stubs for the year.