How did your investments fare in the crazy year that was 2020? We know that investments tied to the stock market fell hard at the end of first quarter in response to the COVID-19 pandemic and generally rebounded by third quarter. By fourth quarter, the value of many investors’ portfolios were back to about where they started the year. So, some experts say an investor’s portfolio performance during fourth quarter will indicate their rate of return for the entire year. But what if your IRA holds investments not tied to the stock market? What happened to the value of those investments in 2020? It’s much harder to make a blanket statement for investments such as real estate, mortgage notes, private stock, shares of ownership in limited partnerships, etc. These alternative investments typically don’t have a readily available value because they are illiquid and not publicly traded and subject to many variables based on location, size, and industry. While these investments provide valuable diversification from stock market investing, they require a bit more effort on the investor’s end to ensure the IRA remains compliant with the tax laws. IRA custodians are required to report the fair market value of IRAs – and sometimes individual investments – to the IRS each year. Additionally, because IRA investments are tax-deferred, any withdrawal from a traditional IRA generally must be included in the recipient’s taxable income, which makes accurate valuation of investments very important.
Valuations of alternative investments are required for the following compliance requirements:
• Fair Market Value Statement - Reports the December 31 value of the IRA to the account owner by January 31 of the following year.
• IRS Form 1099 - Reports the value of cash or assets withdrawn from an IRA, even if taken in-kind (without liquidating) or directly converted to a Roth IRA. This form also indicates whether the asset distributed is one of the hard-to-value assets identified on Form 5498. It is generally due to IRA owners by January 31 of the year following the year an asset is removed from the IRA and to the IRS by March 31.
• IRS Form 5498– Reports IRA contribution and fair market value (FMV) information to the IRS by May 31 each year. The FMV of certain “hard-to-value” investments must be included on this form with an IRS code to indicate the type of investment (e.g., stock, or other ownership interest in a corporation short- or long-term debt obligation; ownership interest in a limited liability company, partnership, trust or similar entity; other assets that do not have a readily available fair market value).
• RMD Calculations– For those in RMD status* the prior year's December 31 FMV is used to calculate the amount that is required to be withdrawn from the IRA each year.
• Date of death valuations– Year-of-death reporting requires final Form 5498 in the IRA owner's name with a valuation as of the IRA owner's date of death. Alternatively, the decedent's Form 5498 may show a zero value if a Form 5498 is filed in the name of the beneficiary with a year-end value.
To comply with these reporting and calculation requirements, your IRA custodian must have an accurate valuation of your alternative investments.
As the IRA owner, you will generally be required to obtain valuations of your alternative investments. Your IRA custodian may be able to obtain values for some investments directly from the investment issuer. For other hard-to-value investments, you are responsible for obtaining a valuation and providing it to your IRA custodian. You may obtain an asset’s value from a designated valuation agent, or you may engage an independent third party to provide an appropriate valuation of your alternative investment each year. For example, real estate investments are typically valued by a real estate appraiser or licensed broker. IRA owners generally may not provide their own valuation either since the valuation could affect the IRA owner’s tax liability. Your IRA custodian may require that you submit supporting documentation with the dollar value you report for the investment.
Mainstar Trust requires IRA owners to submit the prior year-end value of illiquid or non-publicly traded investments by January 7 each year so that Mainstar Trust can complete the required reporting due in January.
A fair market value must be assigned to each IRA investment at least annually for IRA reporting purposes. Obtaining accurate valuations is not only critical to satisfying these reporting requirements, but also for determining your tax liability on any investments withdrawn from the IRA.
If you have questions about valuing your IRA investments, please contact the Mainstar Trust team at 1-800-521-9897 or firstname.lastname@example.org.
*Beginning in 2020, the RMD starting age is increased from 70½ to 72. Those who reached age 70½ by December 31, 2019, had to begin RMDs at age 70½. The CARES Act, however, waived all RMDs for 2020.