Save Your Financial Records, but Maybe Save a Tree

 

As far as financial records go, experts say that we can get by with a lot less paper than in the past because so many more documents, from fund prospectuses to monthly statements, are available online. Mutual fund companies store years and even decades worth of them that can be retrieved and stored, often at no cost.

In addition, starting in 2012, fund companies will be required to report to their customers any cost-basis data for newly bought mutual fund shares and reinvested dividends. That will make it easier to determine the profits or losses on shares you sell.

But it is crucial to keep at least several years’ worth of some types of financial records. If the Internal Revenue Service audits you, you will need to provide evidence of any income, deductions or credits claimed on your last three annual tax returns.

The I.R.S. can also try to collect back taxes going back six years if it believes you have underreported your gross income by 25 percent or more. There is no statute of limitations in cases of fraud, though you may face bigger problems than record-keeping if you have been accused of it.

Either way, mutual fund investors would be wise to save not just W-2 forms and receipts used for deductions, but also records of any sales of stocks, bonds, mutual funds or other assets that show the purchase and sale price. If these details are included on annual statements, you can dispose of individual receipts and monthly or quarterly statements. This alone should reduce clutter.

Investors should also keep records of nondeductible contributions to traditional I.R.A.’s (I.R.S. Form 8606), deductible contributions to traditional and Roth I.R.A.’s (I.R.S. Form 5498) and withdrawals from any retirement funds (I.R.S. Form 1099-R).

For a complete list of what to save, see I.R.S. Publication 552.

Dan Yu, the director of the personal wealth practice at EisnerAmper in New York, recommends that investors keep a list with the purchase and sale prices of all securities they buy and sell. This takes discipline, but it can help avoid trouble later.

“I’ve had horror stories where people had mutual funds, went to buy a home and had to sell funds” yet did not know the funds’ purchase price, he said. “The best way is to log some of the information on spreadsheets, so you don’t need the boxes and boxes and papers.”

Many records are available online, of course, and can be downloaded and stored on your computer, often as PDF files. Even so, it’s best not to rely solely on access to online records because banks, brokerage firms or mutual fund companies can merge, go bankrupt or change policies on data they store.

On its Web site, Fidelity Investments keeps statements for nine years, trade confirmations for three months and tax records for a year. Charles Schwab maintains 10 years of statements and cost-basis data.

“Before shredding and throwing things away, stress-test the financial companies and see what it costs to retrieve documents,” said Christine Benz, Morningstar’s director of personal finance. “It will vary a lot by company for what they will save for you and what they charge for something that’s not saved.”

But Ms. Benz says that there is a risk to saving too much paper, especially if someone breaks into your home. For that reason, she and other financial experts recommend scanning older records and storing them on a portable hard drive or a flash drive that can be kept in a safe deposit box or other secure location. (And make sure you keep your technology up to date, as file formats change.)

HAVING just packed and hauled dozens of boxes of papers to my new apartment, I’m adding scanning to my list of spring-time chores, and plan to shred any documents that include personal or financial information. But, inevitably, I will be left with dozens of folders that I keep in hard plastic boxes.

My habit of saving statements from funds that have already been sold is probably overkill. But my reluctance to let go has sometimes paid off. Because I held shares in some AllianceBernstein funds during the late 1990s, I was invited several months ago to join a class-action suit against Alliance and several other funds that were accused of illegal market-timing trades.

My shares were held in an account at Bear Stearns, which I closed before Bear ran into trouble in 2008. Luckily, I had the annual statements from 1998 to 2003, the years in the suit, and I sent copies to the court administrator in Minnesota. The judge approved a settlement in the case, which by my reckoning could net me as much as $74.09 when the money is distributed.

Still, settlements of even this size are rare, and not enough to justify hanging on to stacks of paper, experts said.

“A potential obligation is not an independent basis for saving documents,” said Mercer Bullard, who runs Fund Democracy, a mutual fund advocacy group at the School of Law at the University of Mississippi. “The cases are too far and few, the documents should be in the hands of the broker-dealer, the odds of a broker going defunct is slim and the dollar amounts are too tiny to matter.”

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