IRA Financial’s Adam Bergman discusses the process of valuing your Self-Directed IRA and why you need to do it.
In his latest podcast, Mr. Bergman talks about the process of valuing your Self-Directed IRA. Since these types of retirement accounts are usually invested in alternative assets, it’s not a simple task. With traditional investments, such as stocks, valuing an IRA is fairly straight forward. Essentially, the value of your IRA is public knowledge. However, when your IRA funds are invested in privately held assets, such as real estate, there is some things you need to do.
Why Do You Need to Value Your Self-Directed IRA?
The IRS requires every IRA to report the Fair Market Value, or FMV, of the plan. Generally the reporting requirements are satisfied by your custodian, such as IRA Financial. The FMV is reported using IRS Form 5498. For example, if you own 100 shares of a particular stock, the share price, as of December 31, can be used to figure out the price. Essentially, the IRS wants to know what your IRA is worth.
In addition, the FMV is needed for other reasons. First, the value of the IRA is needed for any in-kind distributions. That is when you distribute a specific asset from the IRA instead of cash. This may include stocks, real estate, or any other alternative asset. Further, required minimum distributions are based off the value of your IRA. RMDs are required from traditional accounts once you reach age 70 1/2. The FMV of your IRA must be determined first, before figuring out your required withdrawal.
What is IRS Form 5498?
This form is required to be filed for the exact value of your Self-Directed IRA. Further, it states what type of account it is, such as a traditional, Roth or SEP IRA. It also notes the contributions you have made to the account each year. Additionally, if you have transferred or rolled over funds from another plan, Form 5498 will note that as well.
Because undervaluation was seen as a problem in 2013, the reporting requirements become more strict for hard-to-value assets. The form is there to ensure the IRS knows exactly what your assets are worth, especially when distributing from the plan. The main purpose have been real estate investments, but the scope is more far-reaching than that.
Independently Valuing Your Self-Directed IRA
It’s important that an independent, unbiased expert values the assets held in your IRA. Just because you paid X amount of dollars for an asset, does not mean that that is the FMV of the asset. Therefore, it’s important that someone who is fair and honest assesses the value of each asset held in your Self-Directed IRA. Tax assessments from the county or state the asset is held in may also be used. Lastly, trusted online sources can also determine the value.
Without a trusted source, the valuation of your asset(s) may be scrutinized by the IRS. This is especially true when it comes time to pay the tax man. As we mentioned earlier, required distributions are based on the value of the IRA as of December 31 of the previous year. You must have an accurate value of your IRA to determine your RMD. Failure to take the correct RMD will lead to stiff penalties.
Valuing your Self-Directed IRA is a crucial step you must take care of annually. This is especially true if you are invested in alternatives, such as real estate. IRA Financial will help to file Form 5498 on your behalf. However, it’s generally up to the investor to have a proper valuation of his or her assets.
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