More than ever, people are using their computers to prepare tax returns, monitor banking activities, and manage investment portfolios. In fact, many of our clients have completely eliminated the paper trail in their financial lives, preferring instead to receive and archive all financial statements electronically. But are electronic records adequate?

Paper vs. Electronic
Generally, an electronic record has the same worth as a paper record for tax and legal purposes. And the rules for how long you should keep electronic records are the same as for paper records.

But if you decide to go the electronic route, you must take extra steps to make sure your records are safe. This means keeping at least two copies of your electronic records: one copy on your hard drive and another copy on a removable hard drive device, an external data server, or burned onto a CD or DVD. In fact, even if you have paper records, if you own a scanner, you might consider digitizing important records into your computer. If you need help deciding how to organize your documents, your local computer retailer offers software designed to simplify financial record keeping.

Many banks and financial institutions now keep electronic images of your financial records, such as monthly canceled checks or quarterly brokerage statements. If you don't download important items and save them on your own computer, inquire about the institution's policy on how long it will store your records, and how you can access them if you need them. You wouldn't want to lose a tax deduction because your bank didn't keep an electronic image of a canceled check for a sufficient period of time.

How Long Should You Keep Financial Records?

Tax records--We recommend keeping your tax records for up to seven years. This is because the IRS has three years from a tax return's due date to challenge your return, and it has up to six years to challenge your return if you've underreported your income by 25% or more in a given year. The tax records you should keep include statements related to wages, deductions, dividend or interest income, capital gains or losses, and business profits. As for the actual tax returns, it's a good idea to keep copies indefinitely.

Retirement records--You should keep year-end 401(k) account statements at least until you retire, along with any rollover paperwork. Similarly, you should hold on to records that detail your IRA contribution and withdrawal activity--year-end statements should suffice. Also, keep copies of tax forms related to your IRAs until all money is withdrawn from the accounts.

Investment records--When you purchase stocks, mutual funds, and other investments, you need to keep records relating to how much you paid (i.e. "cost basis") so you can document the amount of gain/loss when you sell the asset. You should also keep paperwork showing periodic purchases or the reinvestment of dividends related to the asset, if applicable (again, year-end statements should suffice). When you sell the investment, the records should be kept for up to seven years according to the rules above for tax records.

Home improvement records--If and when you sell your home, you'll need to calculate the costs of any permanent home improvements that you've made for tax purposes. So make sure to keep copies of all work invoices and canceled checks related to your home.

It's All on Your Shoulders
While electronic records can help cut down on the volume of financial paperwork you need to store in your filing cabinet, it's your responsibility to make sure you can access all records--paper and electronic--if and when you need them.