When In Doubt, Don't Shred It...Yet

June 23, 2006 - Identity theft and just too much paper has turned us into a "shredding society." The paperless office may be coming but in the meantime most of us remain awash in financial records. Worst, perhaps, are the investment account statements. They arrive monthly or quarterly for every kind of account: taxable, traditional IRA (deductible and non-deductible), Roth IRA, 401(k), custodial. Do you really need to keep everything in perpetuity? As we begin the second-half of the year it's a good time to take inventory.

Not quite. For the most part, financial record-keeping is all about taxes, and some records are more important than others in that regard. In the case of 401(k)'s and deductible IRAs, any transactions you make inside the account don't matter much, because when you pull money out during retirement you'll just have to pay income tax on everything, including your contributions and all investment gains. You should keep annual summaries from your IRA custodian (Form 5498) or the administrator of your 401(k), and tax returns documenting IRA contributions. And if you change jobs or choose a new custodian, hold on to records showing what happened when. But all those routine account statements can go.

For non-deductible IRAs, you'll still owe income tax on withdrawals, but only on your gains. Therefore it's important to keep track of your contributions, so they won't be taxed twice. You should file an IRS Form 8606 each year you put money into the account, and save a copy. For Roth IRAs, keep all 5498's as a record of contributions. But here, too, you don't have to keep every statement.

For regular taxable accounts and custodial UTMAs or UGMAs, however, you're going to need a lot of file folders. You should keep a record of every stock, bond, or mutual fund transaction-including how much you bought or sold and at what price-and save statements showing any dividends, interest, and other distributions you receive. Stock split dates and particulars are essential, too. All of that information will help at tax time, now and for years to come, when you need to compute capital gains and losses. So make a resolution right now to stay on top of your financial records. And however annoying it may be to have to hold on to these records, trying to reconstruct events years after the fact would be a lot worse.