End the “Paper Chase” of Financial Records

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Mitchell Katz, partner at CA Wealth Management in Bethesda, Maryland, said one reason he and other financial advisors are so busy is because people were stuck home during the pandemic. And after the home renovations and DIY projects, they turned to their finances, financial records and paperwork.

People had file drawers and file cabinets full of this crap. They didn’t know what to do with it or why they kept it.

“They finally got to cleaning up the attic and the basement,” Katz says.  “They moved to finances after they had done everything else because it was the last thing they wanted to do. People had file drawers and file cabinets full of this crap. They didn’t know what to do with it or why they kept it. They spent a fair amount of time cleaning up and coming up with a better methodology to keep this stuff.”

For how long?

But, when it comes to how long you should keep your financial records, the basic rules haven’t changed. What has changed is your options for how to save your records.

“You should keep IRS paperwork for three years from the day you filed or two years from the day you paid the tax, whichever is later,” says Elijah Kovar, founding partner at Great Waters Financial in Minneapolis, Minnesota. However, if you claimed a loss, you should keep the records for seven years, he says.

“Unless you want to keep paper documents with bins of these things, the smart way to do it is to start storing these documents electronically through a secure location that’s cloud based,” Kovar says. “And if you have a fire or a flood or something that could ruin paper documents, then you have an electronic copy that’s not stored in a physical location.”

Some people will email the documents themselves and put them into a folder, like in their Gmail, which is a secure place to do it, Kovar notes.  Others pay for a vault option or store records on a thumb drive.

“But I think electronic file storage is, is smart and more secure than paper,” Kovar point out. “Of course, you have to do it in a smart way electronically. But if you store your documents properly electronically, it’s a lot harder to get them than for somebody to break into a room in your house and take your paper documents.”

Katz says he used to joke with clients that he had to plant a new tree for every new client because of all the paper documents he had to use. That has changed.

Digital to the rescue

“Everything has segued into the DocuSign digital signature,” Katz says. “Before, you might have had a little digital signature. But people could still use paper and sometimes they often like doing that. But with the Coronavirus, when you couldn’t see people, you are forced to use digital signature. Now, probably 99% to 100% of everything we do is, is digital.”

“People get bank and brokerage statements electronically rather than in the mail. It’s a lot easier. They’re not putting it into a folder, they’re not going to scan it. It’s way easier. It takes 10 seconds instead of days.”

Katz recommends that people keep the original document, and at least save quarterly and your annual statements.”

However, a key with financial records is to make sure your spouse or heirs know where to find them in case of mental impairment or death. Kovar says his firm recommends for his clients what he calls a “peace of mind checklist.”

“You don’t have to put everything in one place,” he says, but you do need to give instructions for your loved ones on where they can find banking information, tax information, physical documents like passports and Social Security cards and login information for email, documents storage and social media accounts.

“You might have some things in a safe deposit box, you might have a stack of financial documents in the office and have tax documents stored in our email,” Kovar says. “So having just a central place that they know where to look like an instruction manual is a great idea.”

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