Pursuant to Internal Revenue Code Section 408, an IRA must be established by a “trustee.” A trustee is defined as either a bank, financial institution or state-chartered trust company authorized to administer IRAs. The institution used to administer an IRA is also known as an IRA custodian. An IRA custodian that is responsible for the IRA administration, which includes complying with all IRS filing requirements, including fair market value assessments.
- Every IRA needs to submit the fair market value of its assets
- IRS Form 5498 is used by your custodian to submit the information
- The value of each asset is determined on December 31 of the previous year
IRS Form 5498
One of the most important roles of an IRA custodian is completing the IRS Form 5498. It must be filed with the IRS by May 31 of the following year for each IRA maintained by the IRA custodian during the previous year. The IRA custodian is required to file IRS Form 5498, not the IRA owner.
The form provides the IRS with a snapshot of the IRA based on the information as of December 31 of the previous year. In general, the IRS Form 5498 provides the IRS with the following information:
- Fair market value of IRA as of 12/31
- Amount of IRA of Roth contribution
- Amount of rollover
- Amount of RMD, if any
- Fair market value of certain specified alternative assets
- Indication if the IRA invested in the following assets:
- Stock or other ownership interest in a corporation that is not readily tradable on an established securities market.
- Short- or long-term debt obligation that is not traded on an established securities market.
- Ownership interest in a limited liability company or similar entity (unless the interest is traded on an established securities market).
- Real estate.
- Ownership interest in a partnership, trust, or similar entity (unless the interest is traded on an established securities market).
- Option contract or similar product that is not offered for trade on an established option exchange.
- Other asset that does not have a readily available FMV
In sum, IRS Form 5498 will provide an overview of some of the key details involving the IRA for the previous year. However, it does not provide the IRS with the specific investment, such as stock in Company X. Instead, it provides the IRS with just the category of investment made by the IRA.
Tips on How to Value Your Self-Directed IRA
The Fair Market Value of a Self-Directed IRA is the price at which the asset would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts about the asset. The Fair Market Value may be an estimate of the value.
However, it is good practice to have a qualified independent third-party provide that estimated value. In other words, the value provided to the IRA custodian to compete IRS Form 5498 is not the price you paid for the IRA-owned asset(s), but the value of all IRA-owned assets as of December 31 of the previous year.
Self-Directed IRA LLC & Valuation
In the situation where the IRA owner has established a Self-Directed IRA LLC to make investments, when valuing the IRA, the IRA owner would provide the pro rata value of the entire LLC, including all LLC assets, as part of the IRA value.
For example, if the IRA owner invested $200,000 for 100% of an LLC and the LLC purchased two homes for $200,000, which are now worth $325,000, the IRA owner would provide the IRA custodian with a value of $325,000 for the LLC.
IRA is Part-Owner
If the Self-Directed IRA is a partial owner of an asset, the Fair Market Value used must reflect only the portion of the asset which is owned by your account.
IRA with Debt
If your IRA asset includes a loan or debt, the Fair Market Value of the IRA must include the amount of debt as part of the value. For example, if you use $100,000 in a Self-Directed IRA, and then acquire a $100,000 nonrecourse loan to buy a property for $200,000, the value of the IRA, for purposes of IRS Form 5498, is $200,000 and not the $100,000 of IRA funds used.
IRA with no Value Information
There are times when the IRA owner is not provided the necessary investment valuation information needed to provide to the IRA custodian. This often occurs in private investment fund-type investments that are not subject to the mark-to-market rules, such as private equity or venture capital funds. In these cases, it is common for the IRA owner to use the amount initially invested as the valuation provided to the IRA custodian.
IRA Valuation & RMDs
In the case of an IRA owner that is over the RMD age, which is currently age 73, and is required to take an annual distribution from his or her IRA in the aggregate, it is important that the IRA owner have a third-party certify the valuation of the IRA since the value will have a direct taxable impact. For example, IRA Financial requires all our IRA owners who are required to take RMDs to have a third-party certify the value being provided.
IRA Valuation & IRS Audit
A common question from IRA owners, is whether an extreme change in IRA valuation will trigger an IRS audit. For example, if an IRA was valued at $100,000 in 2019, and now in 2023 it is valued at $950,000. The answer is no one knows. IRAs are typically audited by the Small Business/Self-Employed division and, thus, it is unclear how IRS Form 5498 fits into their audit process.
In addition, the IRA audit activity on IRAs tends to focus on IRA owners above the RMD age since a discrepancy in IRA valuation has a direct tax impact, whereas, if the IRA owner is under the RMD age, an undervalued IRA does not have an impact.
When providing a Fair Market Value for your Self-Directed IRA, it is important to remember that the value provided should not be what the IRA paid for the asset, but its worth as of December 31 of the previous year. Also, if you are above RMD age, it is extra important that the IRA Fair Market Value provided to the IRA custodian be accurate.
Whereas, for investors under RMD age, providing an accurate value of the IRA is important and should still be handled with care, although, you will have more flexibility in this regard. Remember to report the value to your IRA custodian in a timely matter, in order to submit Form 5498 before the deadline.