What do you do with all those financial records you keep stuffing into your filing cabinets? Well, computers and the Internet may cut down the volume of paper financial records you have to save, but even in the electronic age, how do you know which financial records to keep, and for how long? Let's find out in this Fidelity Personal Finance podcast.

Bernard Kiley, a certified public accountant and financial advisor in Morristown, New Jersey tells us, "online access to records allows you to eliminate some of the paper accumulation, but it's still your responsibility to make sure that important records are preserved, whether as electronic files, or old-fashioned paper." So what do you pitch, and what MUST you preserve? Well-organized records can save you big headaches, and significant money down the road, says Kiley. They can provide proof of bill payment and help you dispute billing errors, give your heirs a clear picture of your finances, and perhaps most important, provide the documentation you need to avoid tax problems. Kiley says there are an awful lot of people who don't keep good tax records, and that's a mistake. If the IRS ever questions a deduction, or the value of an investment and you don't have the documentation, it can get very expensive. On the other hand, keeping too many records can also make life difficult. Maria Ku, another CPA from Oakland, California warns, "you can't keep everything, because you wouldn't be able to live in your house or find the documents that really are important." So where do you draw the line? Here are some suggestions from accountants and financial planners.

Tax records. Keep them from three to seven records. The IRS has three years from a tax return's due date to challenge the return. That means you should keep all of the records pertaining to wages, dividends or interest income, business profits, capital gains, deductions, and other tax related areas for at least three years. These include documents such as cancelled checks for deductible items, W2 forms, 1099 forms and mortgage interest documents. But the IRS has up to six years to challenge a return if it suspects you underreported your gross income by 25% or more in a given year. As a result, many accountants recommend keeping records for seven years to be safe. For more detailed information about this, see IRS publication Recordkeeping for Individuals, which can be found on the IRS website at irs.gov.

Keeping good tax records will enable you to file an accurate return and receive all of the deductions to which you're entitled. Maria Ku advises, "if you don't pay attention to your records, you could be forced to give up tax deductions and maybe even have to pay penalties and interest." As for copies of your actual tax return, experts advise that you keep them forever so you have evidence that you did in fact prepare and file a return.

Now here's an anti-clutter tip. You don't need to keep pay stubs after you've received your W2 form and verified that it's accurate. Nor do you need to keep receipts or cancelled checks for items or services for which you are not claiming a tax deduction. What about your investment records? Keep these until you sell the security, plus seven years. If you purchase mutual funds or stock shares or some other asset, you need to keep a record...
[Listen to the entire podcast]