What to Save, What to Shred


Do you have a file cabinet full of old bank statements and pay stubs?

Chances are, you've let them accumulate in part because you're not sure what to save and what to toss. Some papers are vitally important -- especially tax-related papers and documents that are hard to replace -- and some aren't. But how do you know the difference?

"The first thing I tell people is to recycle anything that doesn't have their name on it," says June Walker, author of Self-Employed Tax Solutions and an accountant in Santa Fe, New Mexico. "That's a start."

It gets more complicated from there, however. Here's how to figure out what to keep and what to shred:

Tax Documentation

The IRS can demand to see records as far as six years back. So it's best to keep tax returns and any supporting documentation -- such as W-2 and 1099 forms, brokerage statements and real estate closing papers -- for at least seven years after the last time the documented items affected your return.

Walker recommends making a folder each for income, expenses and deductions. Throughout the year, file the appropriate paperwork in each folder. Once you've filed your taxes, consolidate that year's files into an annual tax folder. As you get your system up to speed, you can add ongoing folders for your house and vehicles.

Lacking documentation when the IRS comes knocking can lead to enormous headaches and unnecessary expense. Helen O'Planick, a tax professional in Manchester, Penn., recently worked with a salesman client who threw out his 2004 driving log -- and then got audited. The client's former employer wouldn't allow him access to old files containing the information he needed to reconstruct his records.

"He tried everything," says O'Planick, "but in the end he paid an extra $5,000, and the ordeal took up a lot of his time."

Bills, Receipts and Statements

Because bank and credit-card statements are generally available online, you may decide to shred them on a month-to-month basis, provided they don't have tax implications. Still, some providers charge for copies of statements older than a few months, so you might consider waiting a year to shred them, if only in case of potential disputes or warranty claims.

You can shred non-tax-related bills and credit card receipts as soon as you receive a cancelled check or statement. However, it's a good idea to keep receipts for big-ticket items, such as cars, jewelry, collectibles, appliances, rugs, furniture and so on, to prove their value in the event of an insurance claim.

You don't need to save every monthly 401(k) or pension statement, but you should save your annual statements, at least until you retire or close the account--again, in case there is a dispute.

Shred annual homeowner's, renter's and auto insurance policies once they're renewed or expired. But keep your life insurance policy and an updated inventory of all the policies you hold -- complete with policy numbers and phone contacts for emergencies -- in a secure location, along with the other key documents that fall into the following category.

Bare Necessities

There are certain items you should keep forever. It may be a hassle to organize them, but the effort it will take now is nothing compared to the trouble you'll be in if you have to scramble for this information after a death or other crisis.

Keep your Social Security cards, birth certificates, marriage license, car title, military discharge papers and other key documents in a fire-proof box or bank safe deposit box. The same goes for your passport and copies of credit cards and other important items that could be stolen. Another option: Exchange copies of important documents with a trusted friend or family member.

Your family may need access to estate-planning documents such as a living trust, will, powers of attorney or health-care proxies, so they should not be stored in a safe deposit box. Make sure to distribute copies to the proper attorneys, executors and/or trustees.

You might consider filling a briefcase or box with key documents. That way if you have to evacuate your home you can grab it on your way out the door. Or go digital: Scan documents and burn them to a disk, or send them to an online storage firm.

O'Planick does just that with all of her business paperwork -- it's uploaded in encrypted form each day and stored securely on a server in Texas. When her computer failed recently and she lost some data, the company was able to recover and return it all.

"You need a strategy so you can access your most important papers when you need to," she says. "You need to save the ones you need for taxes. Then, make a point to shred or recycle everything else."

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