Financial Cleaning? Here's How

Spring cleaning doesn't always involve windows or closets.

The Early Show financial advisor Ray Martin helps us clear out our financial clutter with tips on what records to keep, and what to throw away.

Contributing to this pile of paper are paycheck statements, statements from bank accounts, credit cards, mortgage and auto loan accounts, retirement plan accounts, mutual funds, investment accounts, dividend and interest statements, and confirmations for investment transactions. And if you bought a home or refinanced a mortgage, that alone can generate a pile of paper at least an inch thick!

Here's a scary factoid: the averge , twoi-child, home-owning family in which both spouses work will generate over 1,000 financial statements and receipts each year. Unless you do some judicious file cleaning, you'll need to add an addition on to your home to store this mound of paper.

Here is my guide for what to toss, what to keep and how to get it organized:

What to Toss
You can throw out most receipts immediately but some you need to keep briefly and some indefinitely. Throw out ATM receipts for cash withdrawals once you've written the transaction in your checkbook. Keep bank deposit slips until the deposit appears on your bank statement.

Be careful to tear up receipts that include your account or ATM/credit/debit card number. You can destroy and discard your monthly credit card statements after you've checked the bill to ensure there are no incorrect charges or fees that need to be disputed.

Throw away utility, phone and cable bills after you've checked for accuracy and paid them. If you use a money management program such as Intuit's Quicken or Microsoft's Money, you'll have the ability to run detailed reports of these expenses if you ever need them. For example: if you sell your home, a prospective buyer may want to know your average utility bill.

What to Keep
If you refinanced a mortgage, keep a copy of the mortgage note and the settlement statement. You will need to refer to the mortgage note to verify that adjustments to your interest rate are made correctly if you have an adjustable rate mortgage. The settlement statement includes any interest and points paid that may be deductible.

Keep receipts for appliance purchases; staple them to the warranty and store in a file for all household appliances (from the DVD player to the washer and dryer). Check to make sure these purchases are covered under your homeowners or renters insurance policy

Keep receipts for any expenses that are deductible (See IRS Publication 17 Your Federal Income Tax - for a list of deductible expenses) and keep them in a file for preparing next year's tax return. Keep receipts for expenses that can be submitted for reimbursement from employer-provided health care and child care spending accounts.

Keep for one year
Hang on to monthly statements of financial accounts unless each new statement shows the cumulative activity for the year (which is typical for mutual fund and mortgage statements).

Since most banks no longer return your cancelled checks, hold the pages that include copies of checks for deductible expenses. These provide proof of payment and should be stored with the applicable year's tax returns.

Keep all paycheck statements until you've reconciled them with the year-end statement, your W-2 form and your 401k plan (or other contributory retirement plan) statement.

Keep monthly investment account and retirement plan statements until you've reconciled them with the year-end statement.

Keep for Three Years
Keep your Federal and state income tax returns and related receipts and statements for at least three years. If you are audited, the IRS reserves the right to review tax returns filed during the Period of Limitations, which is generally the past three years, which includes requesting to see supporting documentation for the income and deductions you reported. Therefore, generally you will need to keep your 2004 tax return and related papers until April 2008, and it is generally safe to toss a tax return for 2001 return this April (unless a situation described below applies to you). See link to IRS Publication 552, Record keeping for Individuals

Keep for Six Years
If there is the possibility that you may have under reported income by 25 percent or more, then you'll need to keep tax returns and all related information for six years. When there is substantial activity from a closely held business, or cost-basis records for property, or securities sold are unclear, under reporting income is a real possibility. My rule: keep records and tax returns for years that include out-of-the-ordinary transactions (sales or donations of property) and irregular income (stock option exercises, trust income, etc.) for six years after the due date of filing the return. Keep a 2004 return that includes reporting of irregular items until April 2011, and it should be safe to toss a 1998 tax return this spring.

For Seven Years
Keep any return and documentation that includes a claim for deducting worthless securities for seven years.

For Life of Asset
Keep records of the cost of assets that can be sold or transferred for the entire time you hold the asset. This is referred to as the life-of-the-asset holding period.

Keep a file including the settlement statement and related documents for the purchase of a home. Also, keep any receipts for improvements to a home or property.

Keep all confirmations for investment purchases, stock grants, etc. and attach them to confirmations of sales or transfers of the shares.

Also, the IRS has an unlimited period of limitations to request information and returns for lack of filing or when fraud is suspected. If this is your situation, you have issues other than good record keeping to worry about.

If you've lost a tax return and need a copy, for example because you are applying for a mortgage, not to worry. Copies of tax returns and all attachments (including form W-2) are generally available for seven years from the IRS for a $39 fee and by filing Form 4506, Request for Copy or Transcript of Tax Form.

Keeping It Organized and Safe
Use a filing system organized by account and category. I like to file the statements and records as they come in, rather than letting them pile up for awhile. The important thing is to use a system that works for you.

Close out your checkbook register at year-end and start a new one beginning Jan. 1. Keep the past year's register with your tax records for that year.

Use a multi-file box for your tax return and related statements. These come preset for this purpose. Remember to store these records in a safe, dry place (away from the furnace or the sump pump).

Keep insurance policies, wills/trusts, birth/marriage certificates, passports and other hard-to-replace documents in a fireproof safe box. Also, keep a back-up copy of the financial records on your computer here. You can get a fireproof box from your local department store (Wallmart and Home Depot has them) for $30 to $60, depending on their size. Keep this in a safe place in your home.

Only use a safe deposit box at your bank to store valuable and irreplaceable documents and items. But there are certain items that should not be stored here, your will being one of them. That's because a bank will seal off access to a safe deposit box until the court approves an order appointing a representative to oversee the opening.