Alternative investments are sought after by self-directed IRA investors for many reasons, including the opportunity to invest in tangible assets and assets whose values are not tied to the stock market. Investments that are not readily tradable on an established securities market or that do not have a readily available value are sometimes referred to as hard-to-value investments. Examples of these types of investments include ownership interests in
• A corporation
• A limited liability company
• A partnership
• A trust
• Real estate
While diversifying your investment portfolio with these types of investments can be beneficial, it can also create administrative challenges because IRA assets must be valued each year to satisfy the tax laws. Tax laws require IRA custodians to obtain an accurate valuation of IRA investments each year for
• Reporting of the fair market value of IRA investments
• Determining the value and taxation for distributions, in-kind transfers, and conversions
• Calculating and reporting amounts for RMDs and beneficiary distributions
As the IRA owner investing in alternative assets, you may be required to provide valuations of each hard-to-value investment in your IRA. Because these valuations affect your tax liability on the assets, you will generally not be permitted to determine the values yourself. For certain types of investments, your IRA custodian may be able to obtain valuation from the investment issuer. However, you will ultimately be responsible for obtaining the Fair Market Valuation or a good faith estimate of the value of your alternative investment and providing it to your IRA custodian. You should engage a qualified independent third party to obtain these valuations. If your IRA owns real estate, for example, valuations are typically completed by a certified real estate appraiser or a licensed real estate broker. Documentation supporting the valuation may also be required, as well as a notarized signature of the third party providing the valuation. IRS Revenue Ruling 59-60 outlines an approach, method, and factors to consider when determining the value of assets that do not have a readily ascertainable market value.
STRATA Trust requires that IRA owners obtain the Fair Market Valuation (or good faith estimate) each year and provide it to STRATA Trust to ensure proper reporting for the IRA. In addition to the annual valuation, STRATA requires that a valuation be provided any time there has been a major change in asset value and prior to one of the following events:
• You take distribution of an asset in-kind
• You convert or recharacterize an asset
• You transfer an asset in an account to beneficiaries
STRATA will use the valuations you provide to complete the following IRS-required reporting.
• Fair Market Value Statement – contains the value of the IRA as of December 31 of the prior year. IRA custodians must provide this report to IRA owners by January 31 each year, which means that valuations must be provided to IRA custodians in January each year.
• IRS Form 1099-R – reports the value of an IRA distribution and any tax withholding. This form must also indicate whether the asset distributed is a “hard-to-value” asset as defined in the Instructions for Form 5498. Form 1099-R must be provided to IRA owners by January 31 each year, again necessitating valuations be turned in to the IRA custodian in January each year if a distribution was taken in the prior year.
• IRS Form 5498 – reports the fair market value of the IRA as well as all contributions made to the IRA for the prior year. Form 5498 also separately reports the year-end fair market value of certain types of hard-to-value assets held in an IRA. IRA custodians must provide this form to IRA owners by May 31 each year.
For more information, please see our Fair Market Valuation Update Request instructions and form.
If you have questions about valuation or alternative investment options, please contact us at 866-928-9394 or Service@StrataTrust.com.