Investment Basics: Keeping records in order

November 17, 2006

Here's how to knock that mountain of paper down to size.

Organizing your financial records may not be tops on your to-do list, but it should be right up there. Why? Well, by being able to find important documents when you need them, you'll be able to defend an audit and perhaps dodge any tax trouble. And if something bad should happen to you-something really bad-your loved ones will be able to locate your papers and accounts, and-if the worst happens-settle your estate with a minimum of headaches.

Getting organized isn't rocket science; it just requires discipline. Your filing system can be as simple as a bunch of manila folders marked for each category of records and stored in a fire-rated home safe which you can buy at an office-supply store.

Note, too, the names, addresses, and phone numbers of your lawyer, accountant, insurance agent, loan officer, and financial adviser, if you have one. These people should be able to help in tracking down missing documents needed to complete a tax return or substantiate a claim.

Most important, make sure that someone else knows the location of these documents, including your checkbook: Which things are kept in your bedroom, which are out of sight in an attic or crawl space, and which are stored in your condo upstate?

Like diamonds, some documents are forever

Before we talk about the types of documents you can destroy, let's discuss those that you ought to hang onto permanently. First, keep your tax returns forever, including all schedules and W-2s. Technically, the threat of an IRS audit is pretty much gone after seven years, but if they ever suspect fraud, there's no limit to how far back the IRS can go looking for evidence.

If you've already tossed your older returns, focus on getting copies of those covering the past three years, the period during which most audits occur. If you use an accountant, start with him first. Otherwise, the IRS generally keeps completed Forms 1040, 1040A, and 1040EZ for seven years. To get a copy of a return and all attachments (including W-2s), you'll need to file Form 4506, Request for Copy of Tax Return, which you can download from http://www.irs.gov. (See "Want to know more?" at the end of this article for detailed instructions on how to find forms and publications on the site.) There's a fee of $39 for each return.