Investors love self-directed IRAs for the opportunity to purchase investments that are not tied to the stock market and that allow for diversity in risk and return factors. Yet, this aspect of IRA investing can create challenges for IRA owners and IRA custodians with some types of hard-to-value alternative investments.
Obtaining accurate valuations for these investments is critical to satisfying the tax laws governing IRAs and determining the tax liability on your investments. As the IRA owner selecting the investment, you will generally be required to obtain valuations of your hard-to-value investments and provide them to your IRA custodian. If your IRA holds these types of investments, make sure you understand your responsibilities as an investor and communicate with your investment providers and IRA custodian about the value of your investments each year.
IRA custodians are required to report the fair market value of IRAs and some alternative investments to you and the IRS at least once each year. Mainstar requires the account holder to provide a valuation agent on the purchase of new assets. We send the annual pricing request form to the valuation agent given at the asset purchase. IRA custodians require IRA owners or the designated valuation agent to provide a December 31 valuation early in January so they can meet the first reporting requirement. Under the tax laws for all IRAs, IRA custodians must provide a Fair Market Value Statement to IRA owners by January 31 each year.
IRA custodians must also report the fair market value of the IRA and certain types of investments to the IRS on Form 5498, IRA Contribution Information, each year. The year-end value of certain types of IRA investments will be listed with a specific IRS code to indicate the type of investment. This reporting requirement applies to investments that are not readily tradable on an established securities market or that do not have a readily available value:
IRA custodians must send Form 5498 to the IRS and to you by May 31 each year.
IRA and investment values must also be reported when certain IRA transactions occur. IRA custodians must report the value of cash or assets withdrawn from an IRA, even if you take an asset without liquidating or selling it or you convert it to a Roth IRA. This value is reported to you and the IRS on IRS Form 1099-R. Form 1099-R must be sent to IRA owners by January 31 of the year following the year an asset is removed from the IRA. In addition to reporting the value of the distribution and any tax withholding, Form 1099-R also indicates whether the asset distributed is one of the hard-to-value assets identified on Form 5498. The IRS will use the distribution value to assess your tax liability, in combination with any information you provide with your tax return (e.g., Form 8606, Nondeductible Assets).
Once you reach age 70½, you must begin taking annual payments from your traditional, SEP, and SIMPLE IRAs. The required minimum distribution (RMD) amount is calculated by taking the IRA’s December 31 fair market value from the prior year and dividing it by a life expectancy factor based on your age and the IRS’s life expectancy tables. Your beneficiaries (including Roth IRA beneficiaries) will be required to take similar annual distributions if you do not deplete the IRA before your death (unless they take a lump distribution or satisfy another beneficiary distribution option). To accurately calculate these payment amounts, your IRA custodian must receive a proper valuation of your alternative investments.
An IRA custodian’s policies for obtaining valuations, including responsibility for determining the value and frequency, are typically explained in the IRA plan agreement or other account opening document for the IRA. The valuation may be sent by the asset’s designated valuation agent. Or you may engage a qualified independent third party to provide an appropriate valuation of your alternative investments each year. Mainstar Trust will use these valuations to complete the required reporting.
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.