In today's episode Nicholas Olesen, CFP®, CPWA® walks through one section of the Financial Pillars of Success, Financial Organization, by answering the question, "what documents do I need to keep on file?"
Just last week this question came up while we started working with a new client and we felt it would be great to share here. Many of us know some of the basics, like keeping tax returns for 7 years, but as you will hear, that isn't always the case and there are three other types of documents you should keep on file.
The flowchart we mention throughout and have found helpful to use can be downloaded here: What Documents Do I Need To Keep On File
You can find a transcript of today’s show below.
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Hi, thanks for tuning into A Wealth of Advice. My name is Nicholas Olesen, Director of Private Wealth at Kathmere Capital. What documents do you need to keep on file? And how long do you have to keep them on file?
It's actually a conversation that I have with a client just last week when we were going through what we consider one of the pillars of success, financially, which is financial organization. You know, making sure that they have all their ducks in a row, that they are keeping track of everything.
And they said, well, I get that, but how long do I have to keep all this stuff? So we had a great conversation. I thought it'd be really useful to share it here. I'm gonna break it into a few different categories. One is, you know, tax documents, probably the most important one that people ask questions about all the time, but then also healthcare documents, legal documents.
What about just asset and debt related documents that you have out there and then just other stuff. So let's start off with the one that most people talk about or ask about the most often, which is how long do I have to keep my tax return and do I really need to keep every single piece of document that I have for my time?
And yes, for three years only though, you know, for most people, if you've kept it for longer than that, then you can start getting rid of. With the few caveats. So for three years, you want to, or for the past three years, you want to have both state and federal tax return data and all supporting documentation on file.
And the reason that we talk about supporting documentation and make it so clear is this includes anything to prove. Income deductions or credits that you claimed on your tax return, just because you put it on the 1040 or any other, you know, Schedule C on there does not mean that they're going to believe it.
You have to have a statement, a W2, a 1099, you name it, to support that record that you put. Now certain states like California, you're going to need longer than three years of a tax return. So we actually, for most state side of it, again, look up your own state, what they require or ask you to keep on file, but maybe it's six or seven years.
Once you get past seven years, it's really, that's where you can start shredding and getting ready. All those documentation to it, or just digitalize it. I mean, at the end of the day, it doesn't really matter if you have it on file as paper or digital. And with, you know, being able to store things digitally, the IRS will accept that if you print that back out.
So even when we consider these first, you know, let's do it for three years, , scan everything in, you know, put it in a file a digital file and keep it there. Now the other caveat that, where this three-year window doesn't come in is if you have reclaimed a law. Of worthless security or a bad debt deduction. You need to keep that record for seven years. That's just when the IRS can come back and say that they don't believe you on that one. So that's why we say keep that for a second.
The other one where you do want to keep a record of it, and this one is actually forever, is if you have made taxable gifts or received an inheritance. If so, keep all the 709s that you had on file.
Keep any 8971s or 706s is issued to you along with any supporting documentation in your permanent record. Keep that literally forever. Because those taxable gifts will then go against your lifetime exemption. And if you've received inheritance, you need to be able to show that you received that forever.
They can come back on those down the road and you need to be able to prove upon your passing, your estate needs to show that you did made those taxable gifts to offset your lifetime exemption. So that really is all you have to think about with taxes is , three years, for most things, seven years for a couple of others and anything that has to do with gifts or inheritance, keep those.
What about healthcare? You know, that's kind of the next big topic that we hear all the time, which is, are you going to be applying for Medicaid perhaps due to long-term care expenses or something along those lines? If so, keep all financial statements and records of that transaction for the previous five years to support your application.
Is there is generally a five-year look back on that, which is if you gave away all of your assets, so you can get Medicaid, they're going to actually claw that back and say that you're not going to be able to receive it. So do keep track of you. If you believe that you might be applying in the future for Medicaid.
What about an HSA? You know, do you have one, then you actually need to keep all medical receipts from the date the HSA was open. And the reason we say that about an HSA is the healthcare savings account is interesting in that you are allowed to take money out of an EHR. And not to pay taxes on that.
Distribution is long as you had a receipt that shows you paid for medical expense since your HSA was opened up. And you can obviously only use it once, but let's just say 10 years ago, you started an HSA five years ago. You had a very big bill that you paid just out of your investment account, just out of your cash. No big deal. And now you want to take money out of your age. Well, in order to qualify to take that and not pay taxes on it, you need to prove that you had a medical expense. HSA is the interesting thing is unlike a lot of other plans, they don't require you to have that expense in that calendar. It's just have you had that expense since your plan was open and if so, then you qualify. So do keep a record of those. I mean, you don't need to keep every medical receipt from the date, the agents that was opened up, but enough to qualify, to be able to use those dollars a. The other one was, did you write off any medical expenses on your tax return? If so, really keep those records. As I talked about for three years or six years or seven years, depending on which side of it you want to do on the tax return or how long you're keeping it for your state records.
And then if you're on Medicare, if so, really keep your Medicare summary notice for at least a year or until your bill is paid in full. If you've enrolled in an employer, drug plan, that's considered credible. Keep your annual notice of credible coverage imp that is provided by your employer because you might need that to enroll in part D at a later time.
So that kind of covers the healthcare side of it. Most things are a few years, you know, kind of similar to that tax return three years or five years, and then other ones like the HSA, really just keep that receipt until you use it for a deduction from your.
And what about legal? You know, that's kind of the most the third one that we cover a lot, which is how long do I need to keep things? Or what do I need to keep on a legal side of things?
You know, obviously if you're a us citizen, like keep a copy of your social security card, birth certificate, passport, things like that. We also recommend scan those in and keep those. You should have a secure, digital place that you're keeping all of the things that we're talking about today. It's just useful to have in case something ever happens to the original copy.
Now, if you're a foreign national, keep all documents related to your entrance into the U S such as a passport green card or the .
Now, if you have an estate plan, which we hope everybody does, you need to keep a copy of your will. And trusts power of attorney is general and healthcare living well, beneficiary designations on file store the originals in a safe place, but then consider making copies of them and give them to those that have an important role such as your agent executive or a trustee of those. And again, if you update it and you change those, let those individuals. We'd also recommend keeping a copy, a digital copy somewhere as well, just so you can always come back and print them off. A lot of the law firms that we work with that do draft. These do keep an original copy on hand just in case you need it. But we always recommend keep your own originals in a safe place.
Now, what if you're married, how long, or what do you need to keep? Obviously your marriage certificate should be on file needed in case you're going to change your name, to prove that you have married for insurance purposes for obtaining a joint mortgage. And if you have a prenup, you should also keep that original in a safe place somewhere where you keep your estate plan.
And similarly, alternately, if you are divorced, please do keep your divorce papers on file. When we talk about on file, a lot of the other things, you know, tax documents, healthcare, those you don't need to keep forever the rest of these on the legal side of it. You really do until they are void, because you've either updated your estate plan or something along those lines, you really do need to keep these forever, which is why you need to have a safe place, like a firebox or something like that to keep these types of docs.
Now, what about those that have served in the military? We recommend that you keep your military discharge papers as they might be needed to prove eligibility for veteran benefits. You know, most of the systems are pretty good where they can find you, but again, you need to prove your time. So keep those documents.
Now, one of the questions I get, okay, I have all these documents, where do I keep them? What do I actually need to do with them? Do I need a safety deposit box? I mean, it is a good thing to have a, it is useful. It's an expense. So that's up to you. If you want to do it for most individuals, we recommend having some type of safe whether it's a, a fireproof safe or something like that in your home, that isn't a safe location and really kind of be accessed by anybody without either a key, a code, you know, fingerprint, things like that. That is most typical, how we recommend keeping the hard copies of, or original copies of documents, especially on the legal side. Again, tax documents, healthcare documents, those can all be scanned and kept digitally. And again, keep those in a secure place, whether they are up in the cloud or they are on a hard drive. That's our recommendation for you. Most of the time we are recommending put them in the cloud in a secure, you know, again, make sure you're going with a creditable security device, make sure that you are keeping those in the cloud. You can't have a hard drive that goes bad. And then you've lost all those documents.
Lastly is really what we consider kind of asset and debt related documents. I had a client come in a few years ago and literally brought in three boxes worth of investment account statements and said, , I brought all my statements in just so you guys could review them. And I graciously took them, looked at them and just said, I really only need the most recent one though. Like, I, we can go back and look and maybe for some tax reasons, we'll need some old ones, but I can get all of that information from your tax forms. And so you really don't need them, especially for anything that were opened or investments that were made in the last roughly 10 years, kind of go back to the 2010 ish timeframe.
Everything from then on has been documented, you know, and it's actually 2012, sorry. That is the year where they required custodian. To keep track of your cost basis. As insane as this might sound up until 2012, custodians did not need to keep track of your cost basis. You had to keep track of them. So some investments that you had made before 2012, they're not going to show a cost basis. You need to do best efforts to get that cost basis of your original investment. So I, I digress slightly on here.
What about investment accounts, bank statements, things like that really? I mean, just keep your most recent. Again, most of them are going to be digital right now. So do you really need to actually have a paper statement on hand? That's just a personal preference. If you do keep you your end statement on file until you've completed your tax return and then keep it for those three years and then get rid of it.
You know, anything that was purchased as I just talked about as an investment before 2012 and was in an investment account or a brokerage type of account, something where a 1099 is going to come, you might want to keep, or have, you know, hopefully, you know, we're not now nine years after. Hopefully you have some way to track that if not, there are great tools out there that you can kind of give best efforts.
The IRS does not expect you to know exactly down to the penny, but they do expect you to have best efforts to try and get that information. If you don't. Now, what about retirement plans? It may keep documentation of contributions and withdrawals, which you can usually get all digitally. So I would not worry about that.
If you took any distribution, keep that 1099 R for the few years where you know those three years that you want to keep your tax filings.
The one thing that you do want to keep for a while is any Roth conversion data. So if you've made a Roth conversion, keep that for the three years while you do your tax filing to it. The one side of it that you really want to keep track as is if you made non-deductible traditional IRA contributions, you need to keep your 8606 until the account is fully withdrawn to track cost basis. Most people do not do. You know, we've had a lot of clients who've gone back and we've filed the 8606 years later to show that, I made that, sorry, forgot to put that on the file or on my tax return. That is a form that you will file consistently. So we just need to keep track of your cost basis. So you don't pay taxes twice on that. When you do the Roth conversion, if you know what I'm talking about, great, if not look into the non-deductible traditional IRA contribution and your form, 8606.
What about small business owners? You're going to keep your federal EIN on hand forever. You're going to keep your business formation documents, your ownership agreements, and really any business licenses until those expire. You're going to keep those. As far as payroll records, employment, tax records and receipts for all business expenses, those you're going to keep until you file your taxes and then it's really up to you and the CPA, how long you believe you should keep that again, most of the time is three years.
As far as business asset records, you know, purchases, sales, invoice, deeds, titles, we recommend keeping those ones. Given yourself, all the full deduction for it. So some assets do have a tenured deduction. Other ones have a one-year deduction again, if you can do all in one year. So keep track of those, keep those for the amount of time that you're taking the depreciation on that deduct.
And then what about, you know, records of employee benefits? You know, retirement plan documents, things like that? While they are current, you need to keep them, most of the other forms have to do with your retirement plan. Documents are kept on with whoever your auditor is. But if you do those yourselves, then yeah, you will want to keep track of those and keep those on hand for awhile.
What about debts? You know, it's actually funny. We, we had a client who paid off their mortgage and really got one little just thing saying, , you paid off your mortgage thing. Nothing else. They thought it was gonna be like you know, feel like I had a party after they paid it off, but they did not.
So really we recommend, you know, keep the loan documents until the loan is paid off. You want to be able to refer back to original? What was the date? We signed it. What was the original agreement? Everything, because that document can prove that the loan was either paid in full or not. And so you really need to keep that as far as deeds go. So that's the debt side of things.
What about assets that you own, property that you own, automobiles? Keep deeds, title, settlement statements, bills of sale on file, until you have then gotten rid of that property. You really want to keep any document that shows purchase fees that were capitalized on until you sell the property, because that can help you with deducting that against you don't have gains for it depending on the type of asset we're talking.
Now, similarly on an asset, you know, one thing that we have, especially, you know, with COVID changing the way and how people work and where people work. What about your home office when you going to receive that tax deduction, or if you're on, if you're self-employed, how do you receive that deduction? You really do want to keep all receipts for any type of office related expense to prove that home office deduction. So utility bills, mortgage statements, you name it again, just keep it for the three.
The other side of it is home improvements. We've had a lot of clients that have done big projects, big home improvements over time. We recommend keep those statements so that you can then use that to substantiate any adjustments to the cost basis of your property. In the future, we had a client that had sold their property about two years ago after doing a very large renovation to it. And if they did not have records of all of the work and money they put in it would have had to pay a lot in taxes, but because they were able to increase their cost basis due to this project, they really did not have to pay taxes on that property.
And then lastly, and, and, you know, really a really, really important one is a state related, but it's a little bit different, which is insurance policies. You need to keep those insurance policies, especially declaration pages forever and by forever. I mean, until that policy no longer exists. Whether it's a term life insurance policy that that is over a time, you really should keep your most recent and current policy information. Up-to-date you can always request the originals or copies of them from whoever your provider is, but we recommend just keep the original, you know, when you get the original declaration page, I love when I see clients that have a life insurance policy from 10 or 15 years ago and they pull it out and it's, you know, the pages are all a little bit worn, just cause they've shoved it in the corner. And I haven't really paid attention to it. You should keep those though. Good thing to keep.
So I, I went through a ton of documents here, but it's really, when we think about financial organization, when we look at that as one of our key pillars of financial success, you want to make sure that you know, how long to keep things, where to keep things, what to do with them.
So I hope this was really informative and, and beneficial for you. We actually have a little checklist if you will. That we were going to put up in the show notes. So if you have questions or you want to go through that, download that, please just click on that. And if there's other things you want to touch on or other questions that you have around this or other topics, please do reach out.
We'd love to hear from you. I hope you guys have a great rest day. Take care.