Document Retention: The Do’s and Don’ts

Document Retention: The Do’s and Don’ts

We receive a lot of questions from our clients here at Peak about what documents need to be kept, for how long and in what format. While every person’s situation is unique, we hope this blog post provides some helpful guidelines for you.

The task of reviewing your household files to determine what needs be kept versus what can be shredded, and when, can seem daunting. Oftentimes we don’t wish to toss anything out in the event it is needed at some point in the future; meanwhile, the overwhelming pile of papers we receive month after month continues to grow. In the realm of the digital world, it can be tempting to store everything electronically and get rid of all that paper altogether. This too can become cumbersome, and a strong electronic filing system is necessary to avoid stress and anxiety down the road when you are searching for specific items.

Falling too far on the other end of this spectrum, not keeping support documentation, can also cause problems down the road.  The risk of failing to maintain proper records can result in penalties during a tax audit, failing to qualify for loan applications (or losing out on beneficial lending opportunities), lack of proof of ownership, or lack of evidence in legal proceedings.

In addition to what we should keep, there is also the question of where to store these important documents. If storing physical copies, a home safe, safety deposit box, or stored at an attorney’s office are secure options. Options for storing documents electronically include using an electronic external hard drive, thumb drive, or exploring cloud-based solutions like DropBox, Google Drive, or Microsoft One Drive. We would highly recommend that files are not solely stored on your computer’s hard drive.

Below are some guidelines for what documents should be kept, and in what format.

Personal Identification

Items such as your social security card, birth certificate, marriage certificate, passport, and driver’s license are essential to verifying your personal identity. These items should have the original, physical copies kept permanently, as tracking down replacements can be costly, time consuming, and in some cases, unavailable. Items that don’t need to be kept with you on a daily basis should be stored at home in fireproof safe or other secured location.

Tax Documents  

While current audit rules suggest income tax returns should be kept for a minimum of three years, there are many situations that suggest keeping tax returns and any supporting documentation for a period of 6 years. Forms such as W-2s, 1099s, bank statements, brokerage statements, K-1s, invoices, receipts, closing statements, and receipts for improvement costs should be maintained during this time. Each of these documents can be retained in electronic format that is easily accessible if needed.

Any tax documents pertaining to gifts, inheritances, nondeductible IRA contributions, and Roth conversions should be kept indefinitely to aid in tracking taxation of IRA distributions and gift tax exemptions down the road.

Legal Documents

Key documents such as a will, trust documents, healthcare Power of Attorneys, estate planning documents, pre-nuptial and divorce agreements, and all essential business documents for a business owner should be kept indefinitely in physical form in a secured location. As these documents may be examined for legitimacy in a court of law when settling estate matters or legal proceedings of a business, it is vital to keep the originals safe.

Healthcare Documents

As medical expenses are often deducted on a tax return, it is important to keep record of those expenses for six years. Additionally, documents should be maintained in the event one is looking to reimburse themselves from their HSA account. Individuals often will pay expenses out-of-pocket in the early years of contributing to an HSA and take distributions later for reimbursement once the account has built up.

Documents pertaining to Medicare such as the Medicare Summary Notice and Notice of Creditable coverage should be kept on file for at least a year to help avoid any late enrollment penalties for Medicare Part B and D.

Ownership and Borrowing Documents

Important ownership documents such as deeds to property, bills of sale, expenses related to a property and home improvements should be kept with no time limit. Keeping these records on hand can help an owner in the event ownership is ever challenged or if terms of a purchase or loan come into question.

Other Documents

Other documentation such as college transcripts and certifications should be kept as proof of completion for course work. Additionally, keeping records of certain educational expenses may allow you to qualify for specific tax credits and deductions in the years they are incurred.

We hope this quick outline helps you determine what documents need to be retained and how. Tackling document retention can be a daunting task, but even a small improvement to your current process may go a long way towards making life easier down the road.

 

DISCLAIMER

Peak Asset Management, LLC does not provide specific tax or legal advice, and makes no warranties with regard to such information and results obtained by its use.  Peak Asset Management, LLC, disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information provided. We encourage you to review all your tax or legal questions with your CPA or Attorney.

Peak Asset Management, LLC is an SEC registered investment adviser. This is not an offer to buy or sell securities. Past performance is not indicative of current or future performance and is not a guarantee. The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy.