Get Tax Smart: Insights on Gold, Mistakes, and IRA Forms
At Keen Wealth, "tax season" is never really over.
Our checklist-driven, comprehensive planning process is constantly taking in new information about the folks we work with and changes to tax law. By staying ahead of tax issues, we believe we can help limit surprises when April does roll around, especially for retired seniors who are living on a fixed income.
I'm glad to see that there are folks in our audience who are staying on top of their taxes throughout the year as well. On today's show, we answer listener tax questions about gold, correcting mistakes on your tax return, and a form you might have received in the mail a couple of months ago.
1. "I purchased gold at Costco. How do the taxes work if I were to sell it?"
If you missed our episode last year that touched on this question, Costco has started selling physical gold bars -- I might add, at a markup.
The IRS classifies physical gold as a "collectible," along with things like art, jewelry, and other precious metals. If you sell gold after holding it for less than a year, it's taxed as ordinary income. If you hold it for one year and a day or longer, it's taxed as capital gains at a maximum rate of 28% for folks who are in the 24% income tax bracket or higher. This also applies to gold that you might have in your portfolio indirectly via investments in ETFs or mutual funds that hold gold.
Just to put those numbers in perspective, the tax rates on net long-term capital gains from selling stocks, bonds, or real estate typically max out at 15%. And if you work with an advisor to utilize tax-loss harvesting and other strategies, you might pay little-to-no taxes when selling those investments. You also, typically, don't have to go through the hassle and expense of transporting, storing, insuring, and appraising physical stocks and bonds, which you have to do with physical gold.
Finally, before you load up your Costco shopping cart with bullion, investors should be aware that, as of December of 2023, U.S. stocks posted an average 10-year return of 12.75% versus 4.57% for gold. There may be a place for precious metals in your portfolio, but they may not be the inflation-proof volatility hedge that the folks selling gold on TV would have you believe.
2. "What happens if you make a mistake on your taxes? Is there a certain amount of time that you have to go back and correct your return? And what happens if you owe more money?"
By law, the IRS has four different timeframes during which they can raise issues about your taxes.
Three years is the normal timeframe that the IRS has to question information on individual returns.
The IRS has six years to question individuals it suspects of omitting 25% or more of their income from their tax return in a given year.
If the IRS determines that you owe money, they have a 10-year window to collect it, as well as the ability to seek extensions.
And the IRS has a "forever" window to investigate folks who have never submitted a tax return or who didn't submit a return for a specific year under investigation.
Yes, there are usually penalties involved if the IRS determines you underreported or underpaid during these windows. But perhaps a better way to think about this question is: What's going to raise a red flag with the IRS?
It's very unlikely that someone is going to "forget" to report more than a quarter of their income. And the IRS extending beyond that 10-year window mentioned typically applies to folks who owe six-figure sums. So, if you're filing an honest tax return every year to the best of your abilities -- or working with a professional – the chance of an audit is much lower.
3. "I received a 5498 form in May about my IRA. What is this form for? Do I owe more taxes?”
Form 5498 is an activity report for the previous year for your IRA. This report tracks your contributions to and movement of money between your retirement accounts, such as rollovers. It's distinct from your 1099, which reports distributions from your IRA. And it's not a tax bill.
The IRS usually won’t do anything with your 5498 unless they think there's a problem with your return. If you handle your taxes and your financial plan solo, you'll want to check your 5498 to make sure that all of your activity for the past year was coded properly so that you’re complying with the law and getting the benefits that you intended. For example, if you made a large conversion into a Roth IRA last year or made transfers or rollovers between company plans and IRA’s, check closely that no mistakes have been made in the coding of these moves to make certain you only pay the tax that you owe.
Better yet, work with a team of fiduciary professionals who could help prevent these kinds of mistakes before they happen!
No matter how good you are with spreadsheets and tax software, in my experience, the benefits of working with a CPA or tax professional and a financial advisor can be worth the investment. And when you’re working with Keen Wealth, you can rest assured that we’ll regularly review your tax picture to coordinate and optimize every piece of your financial plan.
We’re always happy to hear from our readers and listeners! Get in touch if you have a question or topic that you’d like us to discuss on a future show.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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