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Making a new year's paperwork resolution

As a new year arrives, one good financial resolution should be to organize that paper pile of documents and decide what should stay and what should go. By Vanessa Richardson.
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As a new year arrives, one good financial resolution should be to organize that paper pile of documents and decide what should stay and what should go.

But for some people, that pile can be so big and disorganized, they’ll shove it back in the drawer and focus on losing weight or quitting smoking instead as an easier task.

Don’t avoid it, said Jim Lange, a certified public accountant in Pittsburgh, and author of "Retire Secure! Pay Taxes Later: The Key to Making Your Money Last as Long as You Do." “Yes, you may be keeping those papers, but many of us aren’t organizing them in a way that they can be retrieved quickly when needed.”

The time of year you organize them is also key, he said. “Many people tackle their papers in February or March before doing their taxes, but doing it in December could be better since you may find some year-end tax advantages to take care of.” For example, a quarterly update about your employer’s flexible spending plan may jog your memory to buy necessary medical supplies before the Dec. 31 deadline.

Simply knowing the time frame for keeping certain financial documents is the first step to getting organized. Some documents you need to keep for life, others for a few years and others you can toss immediately. Lange divides his papers by topic, such as “tax returns” or “home mortgage info.” He places them in boxes and lists a “throw out by” expiration date on many of them to know when it’s safe to toss them out.

Make a list of your tax and accounting documents with guidelines of how long to keep them. Post it somewhere where it won’t be buried in paper. The basic groups of papers to put in order are: 

Documents you never want to part with. These are the ones that are truly life- and death-related, such as birth certificates, wills and marriage licenses. Then there are those that have long-term implications for your finances and retirement plan, particularly tax returns, the cost basis of your investments and records of non-deductible IRA contributions.Papers that go out with the old. With these documents, the general rule is that as long as you are responsible for an item, you should keep the papers related to it. These include house deeds and car titles. “When you sell your house, chances are you will be buying a new one and will therefore have a new deed to keep up with, so don't let the old one clog your filing cabinet,” said Lange.Tax files with a seven-year itch. The standard rule is to keep all tax returns and related documents for seven years, like canceled checks or receipts with tax implications (alimony, charitable contributions, mortgage interest and retirement plan contributions) and credit-card statements if tax-related expenses are documented. File them by date to ensure you don't keep them longer than necessary. If you don’t expect to be accused of fraud, you can pitch in three years. Records with a one-year expiration date. It’s your fastest-growing pile of paper, but the good news is that it’s also the pile that can be purged at the end of every year. These include quarterly statements of retirement plans, monthly bank statements and bills with no long-term tax importance.

There are also a few tools to invest in for better protection of your financial data. To thwart identity theft, use a paper shredder instead of a garbage can to toss unneeded documents. Use your computer and a scanner to make electronic back-up copies of all paper documents and then file them in a portable memory sticks or recordable CDs.

"In case of an emergency, you have that little memory stick and know your numbers and records (are) at your disposal," says Lange. Many of the larger-capacity memory sticks come with password protection, so they’re also a great place to store your information for online accounts.

As for the hard copies, keep them in a fireproof storage box or invest in a safe-deposit box at the bank. Another good backup is to keep copies of very important documents, such as wills and birth certificates, with your lawyer or close relatives. "The best-case scenario would have you saving your information both electronically and in hard-copy form," Lange says.

"Either way, be sure to develop a filing system that is easy to use," he said. “If your system is too complicated, you won't keep it up.”