The length of time a financial record or document should be maintained is a question we at Bowen Financial Services receive regularly. The answer is one that our clients hear in response to many of their questions: It depends. In this case it depends on the type of document and the kinds of transactions you were engaged in. Since this question is most commonly asked in reference to tax documents, that is where we will focus.
As a general rule, you should keep records for at least 3 years. That’s how long the IRS has to question items on your tax return and to bill you for any additional tax. However, the IRS can go back as far as 6 years if a return omits more than 25% of income. (If fraud is proven, then there is no limit as to how far back the IRS may go to seek additional taxes.) 3 years is also the timeframe for you to file an amended return and seek a refund. State returns may have to be retained longer, depending on the state.
After 3 years, don’t automatically throw out all returns and records. Instead, look over the old documents to see if you may need any parts of them in the future. For example, it’s a good idea to hold onto records that help establish the adjusted basis of real estate. Ideally, you would have a separate file for each piece of property you own, including your home. In this example, you should hold these records until at least three years after you dispose of the property. The same goes for security transactions: be sure to keep your purchase documents as you will need to include the purchase date and cost on your tax return the year you sell the assets. Other pertinent records include those detailing stock splits, dividend reinvestments, and nontaxable distributions.
For inheritances, hold onto any record establishing the value on the date of death. For gifts, hold onto any record establishing the donor cost. It’s wise to keep these documents until after you sell the asset.
If you’ve made nondeductible pay-ins to IRAs or post-tax pay-ins to 401(k)s, you should keep records until three years after the accounts are depleted. Be sure to file Form 8606 to report nondeductible IRA contributions for the year the contributions were made. If you don’t, those contributions will be treated the same as deductible contributions when withdrawn. Remember that all distributions from your traditional IRA will be subject to tax unless you can show otherwise, so make sure to retain copies of Form 8606 and your 1040s for each year that such pay-ins were made. It would also behoove you to keep statements that reflect the amount of IRA distributions.
There are countless more examples, but as you can see, each type of document has a different recommendation for how long to hold onto it. As a general rule of thumb, you should keep all documents for at least 3 years, and any record that helps to establish either the cost or value of your assets should be kept until at least 3 years after you dispose of that asset.