How long should you hold on to financial records, anyway?

When it comes to record keeping, there are only two types of people, says certified financial planner Art Ford: the keepers and the recyclers.

The majority of people fall into the keeper camp, says Ford, and they needlessly keep everything. The recyclers, on the other hand, throw everything away. "Not many people fall in between these two categories," he says, even though that's where most people should be.

Fortunately, right now is an excellent time to review your record-keeping strategy, and, if necessary, refine it. Why's that? Because this is the time of year when you gather together all the bills, receipts, W-2 forms, 1099s and other documents needed to file your 2000 taxes. If finding all that stuff is a chore, chances are it's time to do some purging. Question is, what should you throw away?

That depends on the type of document, of course. The biggest reason folks hang onto financial records is out of sheer terror that the information will be needed should they get audited by Uncle Sam. Conventional wisdom has it that the statute of limitations on an audit is seven years.

"That's the seven year myth," says Eric Scheer, a senior tax manager at Deloitte & Touche. The truth is, you only need to hold onto the papers needed to file your taxes for three years. That's how long the average return is open and could be subjected to an audit. Keep in mind, if you file before the April 15 deadline the three-year statute-of-limitations period starts on tax day rather than the day you filed. And if you filed an extension, the IRS has the right to look over the information for an additional two years from the payment date.

A couple of caveats: First of all, you should probably keep your actual filed tax returns indefinitely, just in case the IRS questions whether you filed a return at all in a certain year. Also, Scheer points out that if you substantially understate your income, the IRS has six years to conduct an audit. A substantial understatement means you "mistakenly" omitted more than 25% of your gross income. This is obviously a pretty big oversight, and "generally you know if you fall in that category," says Scheer.

For simple bills not related to your taxes, you should probably hang on to the paperwork just long enough to know that you don't have any billing disputes with the vendor, says Ford. Assuming that you don't use your phone or utility bill as a home-business deduction, for instance, one year is probably more than enough holding time. This same rule applies for medical bills, although you might want to hang on to these longer as a means of keeping track of what tests and checkups you've had.

Keep in mind that most bills -; like credit-card statements -; can be reproduced, if necessary. Some creditors, like American Express, let you download six months of historical statements from their Web site for free. Other banks or creditors might charge you a small fee for the service, says Ford. And if you use a software program like Quicken or Microsoft Money (which is an excellent way to cut down on the paper clutter), just be sure your billing information is backed up.

When it comes to more complicated documents like legal papers or real-estate records, you should hang on for the long haul. Likewise, if you know that a document might be hard to duplicate -; like a birth certificate or a passport -; you might want to consider buying a small fireproof box for safe storage.

Here's what our experts said is the recommended holding period for various types of documents: