The Wealth Spa

Are You Drowning Under Piles of Paper?

Posted on 06. Jan, 2009 by Elizabeth Potts Weinstein in Legal

Modern families can accumulate a large amount of paper and information, similar to a mini-corporation.  The management of these records can overwhelm and frustrate many people, resulting in disorganized, voluminous files, and the inability to locate important information when it is needed.  The following series of questions & answers addresses issues families may face in managing their important documents and records.  

Why Should I Keep Records?

You should keep certain documents and records because you are required by law, and because you may want the information in the future for financial or personal needs.  But you need to determine the correct documents to retain for the right length of time, and organize these documents in a logical manner, to save yourself from future frustration.  

Where Should I Keep Records & Documents?  

You may keep records and documents in a safe deposit box, a personal fireproof safe at your home or office, your home file cabinet or file box, your computer, on electronic media (like a CD-ROM), with your attorney or other professional advisor, or, most likely, a combination of the above.  Determining where these documents should be stored is based upon the importance of safety and security versus the cost of storage and ease of access to the documents. 

How Should I Organize My Filing System?

Your filing system should be divided into three categories, and have a overall record directory summarizing important information.  The first category contains important records and documents that need to be kept in a secure location.  These documents should be kept in a home fireproof safe, a safe deposit box, or with a financial or legal professional.  

The second category contains the files you are currently using on a regular basis.  Your current files can be stored in various ways, such as in a formal file cabinet in a home office or a small box in the corner of your bedroom.  The files should be alphabetized and organized into consistent categories, such as charity, bank records, tax returns, or investments.  For large categories such as investments, the files should be subdivided into specific topics (such a subfile for each IRA), or for each person in the family.  Documents inside each file or subfile should be kept in chronological order.  

There are systems available with pre-labeled file folders that can be purchased for a minimal fee.  For example, HomefileTM is a system produced by two financial planners, consisting of pre-labeled folders and a guide explaining which types of documents to keep in each category, and for how long.  The system is available for purchase at http://www.homefile.net for $24.95.  

The third category contains your archived files that you will not need to access on a regular basis, but need to keep for historical or legal reasons. These should be organized in the same categories as your current files and may be kept in a location separate from your current files, if they become crowded.  Be careful of storing your archived files in basements, attics, and garages, where the files may be easily damaged by water or other substances.  

Your record directory should summarize where each category of documents is stored, and list all of your bank and investment accounts, retirement accounts, life insurance policies, and other major property (such as real estate or limited partnerships).  This directory should also list up-to-date contact information for your tax, financial, and legal advisors, your medical professionals, and the individuals mentioned as trustees, beneficiaries, or executors in your will, trusts, retirement accounts, or life insurance policies.  If you are incapacitated, your record directory will enable another person to be able to handle your affairs or locate the persons who can assist them.  Whomever would handle your affairs in your absence should know the location of your record directory, and you may consider reviewing the directory and your file system with them before it is needed. 

What Documents Do Not Need to Be Kept in My Files?

You do not need to keep every financial document.  Some people become overwhelmed with papers and filing because they mistakenly keep every receipt and stub, but some repetitive documents do not need to be stored indefinitely.  The following list contains commonly retained items than can be regularly shredded and purged from your files:

• Paycheck stubs, except for the most recent, the last received from a particular employer, and last of the year until a W-2 statement is received in January.    
• ATM receipts, once entered into checkbook and checkbook is balanced, unless cash was used for deductible expense (retain for tax purposes).
• Expired Warranties, and Manuals for products no longer owned.
• Cancelled Checks unless deductible expense (retain for tax purposes).
• Expired Coupons and Gift Certificates.
• Receipts, after cross-checking with credit card or bank statement, and when not needed for warranties, returns, or tax purposes.  

When Do I Purge Documents Out of My Files, Or Archive Them?

Each year you should go through your documents to archive documents not regularly needed so your files do not become crowded with outdated documents.  An appropriate time for this exercise is at year’s end, or after tax returns are filed.  The following list contains commonly questioned categories of documents:

• Tax-related documents (tax returns, charitable contributions, tax-deductible expense records):  After tax return is completed, keep supporting statements, receipts and cancelled checks for tax-deductible expenses with the tax return for the appropriate year.  After three years archive the tax return and supporting documents.  After seven years the tax documents may be purged from the archives, but may be retained as a historical financial record.  
• If you are depreciating property, retain all returns taking the depreciation until the property is sold.  If you are carrying over a loss (such as a passive loss) or paid Alternative Minimum Tax, return tax records until payment is no longer recoverable.
• Gift tax returns (Form 709) and records of gifts over $11,000 (or the appropriate gift exemption for the year) should be archived indefinitely.    
• Property (real, personal, investments) that has been sold:  Archive documents related to the payment of taxes, documents showing the price and date you purchased and sold the property, and transfer of title or license documents.  Retain for seven years after sale.  
• Records involving property gifted or property exchanged under IRC 1031 should be archived indefinitely.  
• Credit card statements: May be purged yearly unless archived with tax return.  
• Bank statements:  Archive end-of-year statement for three years.  Archive Form 1099 with tax return, if applicable.  
• Investment and brokerage account statements:  Retain monthly or quarterly statements until end of year, then purge after confirming that the statements conformed with the end-of-year Form 1099.  Archive Form 1099 with the tax return.
• Retirement accounts (if not included as investment accounts above):  Archive end-of-year statements for seven years.  
• Non-deductible IRA contributions:  Archive deposit records indefinitely (used to calculate cost basis of IRA distributions).
• Social Security:  Purge previous Earning History Statements each year as you receive and verify the current statement.  
• Employment information:  Retain records of employment benefits as long as you may be eligible for benefits (including retirement benefits).  Purge salary information except for documents used to support a tax return.  
• Estate planning documents:  If the trust has been terminated or rendered legally obsolete, archive a copy.  If a will, power of attorney, or living will has been rendered obsolete (replaced by another entirely new version) destroy original and all copies.  

What Categories of Documents Should Be In My Files?

The following is a suggested list of document categories, that should be modified according to each family’s situation.  Each file should contain sub-files by account, type, person, or year, as applicable.

• Automobiles
• Bank Accounts
• Charities
• Credit Cards & Loans
• Education 
• Employment/Military
• Estate Planning
• Expenses
• Income Taxes
• Insurance: Automobile
• Insurance: Health
• Insurance: Life
• Insurance: Home
• Investments
• Medical
• Personal
• Record Directory & Safe Deposit Box Inventory
• Residence
• Self-Employment/Hobbies (should create a separate file system for a small business)
• Social Security 
• Warranties & Receipts

Do I Need a Safe Deposit Box And/Or A Home Safe?

Yes, you need a fireproof and secure location to keep important, original records.  A small safe deposit box should be relatively inexpensive and an appropriate location to keep many important, original documents safe from being stolen or destroyed.  However, because larger safe deposit boxes may be difficult or expensive to obtain, especially in metropolitan areas, and are inconvenient to access, a fireproof home safe is a helpful addition to store documents that need to be accessed regularly (passports for regular travelers) or are voluminous (family photographs).  A home safe should be rated to withstand at least one hour in a 1,700oF fire by Underwriters Laboratory.  Be sure to follow the directions for using the safe, and bolt the safe to the floor or wall to prevent a burglar from easily removing the entire safe in a robbery.  

You may also use a locking file cabinet for less important, but confidential financial files.  This will not prevent professional burglars from accessing your records, but may stop visitors or workers in your home from casually obtaining access to your financial information.  

What Goes In My Safe Deposit Box?

Your safe deposit box and/or fireproof home safe should be the location for original legal and ownership records, as well as valuables such as jewelry, gold, coins or collections, and sentimental valuables such as family photographs.  Such records include:  adoption, birth, death, and marriage certificates; citizenship papers; divorce decrees and property settlement agreements; passports; deeds and titles to property; bonds; stock and other investment certificates; insurance policies; patents and copyrights; copy of social security cards; and copies of wills, trusts, and powers of attorney.  

You should also keep a household inventory record in your safe deposit box.  This inventory is a list or other record (photographs or video) of your household belongings, in case of burglary or fire.  This inventory should be updated every semi-annually or annually, and when substantial purchases are made.

You should keep a copy of your Record Directory (discussed in Part I) in your safe deposit box.  

You should not store your original will, trust, or power of attorney in your safe deposit box unless you have specifically cleared this practice with your attorney.  In many states, safe deposit boxes are temporarily locked upon a person’s death, making it difficult to obtain the original of such documents for probate and trust administration.  The originals of such documents may be better retained by your attorney or stored in a fireproof home safe.  

Can I Keep Records on My Computer or Do I Need To Print Hard Copies?

You may store documents electronically, but should not store the only copy on your hard drive, in a proprietary software format and unknown location.  

Important documents on your computer need to be organized in the same way as your other files, by saving them in directories identical to your file folder categories or using a reliable searchable coded file system.  

All records should be saved in a common and easily retrievable format (such as Word, Rich Text Format, or PDF).  If your particular software license expires, or your computer crashes, you want your documents to be retrievable by another program or computer system.  One solution is to create PDFs of your important computer documents and reports through a PDF generation software program, such as Adobe Acrobat or PaperPort.  

Because your hard drive may fail or become corrupted, your electronic files must be backed up and stored in a location other than on your computer hard drive.  Your files can be printed and stored with your hard copy files, or can be saved electronically on a floppy disk, on a CD ROM or DVD ROM, with an offsite storage facility, on a tape drive, or on a removable hard drive.  Even if you back up your hard drive regularly, your important documents should be stored separately from your regular backup.  

Doesn’t My Tax Advisor, Accountant, and/or Attorney Keep The Important Documents For Me?

Regardless of what documents your professional advisors retain in their files, you should still retain a copy of all important tax, financial, and legal documents.  You personally have a legal obligation to retain tax records, regardless of whether you have a tax advisor prepare your returns.  Also, you do not want to have to contact your professional advisor each time you need to access these records, such as if another professional advisor is going to review your records to perform related services.  Especially if you have a falling out with your advisor, or your advisor goes out of business, you do not want the frustration of having to track down the location of the only copy of your records or discovering the documents were mistakenly lost or destroyed.  

Photo courtesy of mrmanc via flickr. 

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Tags: archive, credit card statements, document, electronic media, file cabinet, files, filing system, important records, records, Retain, safe deposit box, systems, Taxes