How long should you keep financial records?

One of you asked how long one should keep tax returns, bank and brokerage statements, etc. Since I think this information will be of general interest to all of you, I decided to put it in one of my client emails. This information comes from a variety of sources, including my CPA wife, the IRS, the SEC and FINRA, the CFA Society and the AICPA, we well as KCS’s own practices. This is meant as a guide only and not the final word on the topic, as experts will often disagree (as they do in most things).

First, tax records. Backup for your tax returns, such as receipts, canceled checks for charitable contributions, bank and brokerage statements, 1099’s, W-2’s, etc. should be kept for 4 years after your return was filed (or the due date for the return if later). Thus, if you filed your 2008 taxes on April 15, 2009, you should keep all these records until April 14, 2013, at which point it is generally safe to shred them. If you had an extension and filed on Oct. 15, then you should keep your records until Oct. 14, 2013.

There are two exceptions to these guidelines: It’s usually a good idea to save the tax returns themselves forever, partly as proof of filing, and also for useful data in filing future returns. If this seems too long, then 10 years is a reasonable compromise. The second exception is evidence of the cost basis for investment property (stocks, bonds, real estate, etc.). These should be kept as long as you own the asset, then filed with the tax records for the year in which the asset was sold (and thus kept an additional 4 years). This can be a LONG time: I only recently sold shares of stock my father had bought in the 1950’s!

Evidence of the purchase cost of a financial asset can typically be found on your brokerage statement, as well as on the trade confirmation. The latter is usually easier to keep for a long period.

Insurance records, including policies and appraisals or purchase receipts for insured property, should obviously be kept at least as long as the policy is in force; it’s probably best to keep the policies themselves for at least 3 or 4 years after they’re canceled, along with the last year or so of policy statements. Purchase receipts should be kept at least as long as you intend to insure the property (if it’s also an investment asset, see above). Some say that old appraisals can be discarded once you have new ones, but others suggest keeping appraisals forever. The latter approach provides a history of the property’s value.

Lastly, there are things you should keep forever: copies of all versions of your living trust, other trust documents, wills, durable powers of attorney, healthcare advance directives, birth certificates, citizenship papers, medical records, diplomas and transcripts, marriage and adoption papers, divorce and separation agreements, and other really important papers. Note that regarding documents that are periodically updated (especially wills and living trusts), make sure that the latest version is always clearly indicated and readily available. You don’t want your executor mistakenly using an outdated document!

At this point, you’re probably thinking, “That a LOT of paper to keep!” And some of it should be stored in a safe place, such as in a safe deposit box. But for many documents, especially financial records and tax returns, there’s another option: electronic storage. That’s how we keep just about everything at KCS, including many of our clients’ records. As we look at expanding the kinds of client records we keep for your convenience, as well as how to make them readily available to you (such as over the Internet), here’s a rundown of what we currently keep on file and for how long:

Financial statements: For all accounts to which we have direct access, most obviously your Fidelity brokerage accounts, but also certain other types of investment accounts, we keep electronic versions of the statements for 7 years (as per SEC and CFA guidelines). Fidelity keeps 18 months accessible online through Fidelity.com (they also keep older statements, but we typically have faster access to them). We keep cost basis information as long as you own the asset, plus 7 years after you sell it.

In addition, we have transaction information in our portfolio management system back to when you first became a client of KCS. For those of you who were previously clients of Gay Abarbanell, we often have transaction information going back many more years. Access to this information can be surprisingly quick.

Any document that you have provided to us, either in electronic or paper form, is kept electronically for at least 7 years, and longer if it’s one of those “forever” documents listed above. Thus, if we don’t have the most recent copies of your living trusts, wills, insurance policies and other important papers, as well as tax returns going back several years, please don’t hesitate to send them to us for storage.

To get them to us, it’s obviously easiest if you have them in electronic format (PDF’s or TIFF’s are preferred). Some people are concerned that regular email could be intercepted, and we are looking into an easy and convenient means for you to email us encrypted documents. However, we host our own email server here, so that a hacker would have to grab an email during the brief time it’s in cyberspace, as our emails are not stored on any outside server that might be prone to hacking. So the odds of your email falling into the wrong hands, while not zero, are extremely low.

For paper documents, it’s best for you to send us a clean copy of the document that we can scan and then shred. We don’t recommend sending originals of important documents through the mail, but if you must do so, registered mail is best (we will return the documents by registered mail as well). Another option is to physically bring the documents to us, such as during one of your scheduled meetings; we can scan them and return the originals to you before you leave our offices.

Note that we’re not really a document storage service, so I’m not recommending that you discard originals of important records and documents just because we have them here. While we make frequent and multiple backups of all your data, I see having your documents at KCS more as an added failsafe and convenience to also keeping them yourself. On the other hand, if you have the ability to store electronic copies of documents that don’t necessitate keeping hard copy originals, we can provide you with PDF’s so that you can save storage space at home. (As always, back up your hard drives regularly, and also keep important documents on archival CDs or DVDs.)

So there you have it: more information than you probably ever wanted on record retention. But boring as it is, I’ll be this info will come in handy someday, perhaps when the IRS comes a-knocking.

Oh, by the way, the S&P 500 hit another new high for the year today. It’s now up about +6.5% so far in 2009. Not terrific, but a welcome change from 2008! Meanwhile, our benchmark, the MSCI ACWI [All-Country World Index], is up a much more impressive +17.2% so far this year, and a whopping +54% above its March 9 low. Yet despite these big recent returns, many are still denying that the bear market is over. What’s your opinion?