If you have an IRA account, you (or your custodian) must report its fair market value to the IRS each year.

Determining the fair market value is generally easy with a regular account.

But what if you have a self-directed IRA with more complex assets?

We’ll help you understand fair market value, how it relates to your SDIRA, and when you may need to work with a third party to determine your IRA’s FMV to ensure you’re properly reporting your assets to the IRS.

What is the FMV of an account?

Your IRA’s Fair Market Value (FMV) is the total monetary value (not cost) of all assets held in your self-directed account.

The FMV is typically calculated annually and based on market prices on December 31st, the year’s close. Your custodian must report the FMV of your account

Some assets in your IRA, like stocks and mutual funds, are easy to value because the item’s worth is clearly reflected in the market.

Determining the value of other assets, like real estate and LLCs, is more complex and requires a Fair Market Value analysis.

Your self-directed IRA FMV will reflect the value of all assets, including easy-to-quantify ones, such as stocks, bonds, and mutual funds, as well as assets, such as real estate and some promissory notes.

Determining your IRA’s FMV does more than help you identify the total value of your retirement plan. Doing so also helps you and your custodian:

• Meet IRS reporting requirements
• Ensure that your account complies with Title I of the Employee Retirement Income Security Act (ERISA)
• Determine required minimum distributions, if applicable
• Complete form 5498

What does FMV of Account on Form 5498 mean?

Each year, your IRA custodian must send you and the IRS Form 5498.

This form contains valuable information about your IRA account, including the FMV (Box 5) of your account as of December 31.

The form, which must be submitted by May 31 each year, also includes the type of IRA account(s) you have, your annual contributions, and any distributions you took.

Though information on Form 5498 can help you determine your required minimum distribution (RMD), you don’t need to worry about completing it or sending it in. Your custodian is responsible for this form, but you should keep it for your records.

How do you report Fair Market Valuation on your taxes?

Your IRA FMV is reported annually on IRS Form 5498, which your custodian completes.

If your IRA contains easy-to-price assets, like stocks, mutual funds, or precious metals, then you or your custodian can use the price of the assets as of December 31.

However, suppose you have a self-directed IRA and more complex assets. In that case, you may need to work with a third-party individual, like a CPA, attorney, or county tax assessor, to determine the FMV of assets in your portfolio.

This is particularly true if you’ve invested in real estate, an SDIRA LLC, or promissory notes.

How FMV of account impacts required minimum distributions (RMDs)

Unless you have a Roth IRA, the IRS mandates that you begin taking a required minimum distribution (RMD) once you reach the age of 70 ½.

How much of a distribution you’re required to take each year depends on your age, marital status, account FMV, and whether or not you’re the account holder, their spouse, or a non-spouse beneficiary.

Who is qualified to value my assets in my IRA?

In most cases, you’ll need an independent third party to determine the value of your self-directed IRA asset. Which individual or entity that’s qualified to determine the FMV of an asset will depend on the nature of the asset.

For instance, a real estate appraiser or tax assessor may be best qualified to determine the real estate value held in your portfolio.

Likewise, a CPA or financial advisor may be best suited to assess an LLC or promissory note.

Qualified evaluators may include certified appraisers, licensed real estate agents or brokers, CPAs, attorneys, financial planners or advisors, or even independent valuation companies.

Your custodian can help you determine if you should seek a third party to determine an asset’s FMV and, if so, what type of individual or entity is best suited based on the specific asset.

If you do need an independent third party to determine the FMV of an asset, you’ll likely need to pay for it.

Keep in mind that you cannot conduct business with a disqualified person and that the IRA (not you) must pay for the assessment.

How to value LLCs, Real Estate, and other assets in Self-Directed IRAs

If your self-directed IRA includes an LLC, real estate, or another commonly held asset, you’ll need to do some extra leg work to determine the FMV of the asset.

Exactly how you determine the value depends on the asset itself.

Before you conduct a valuation or reach out to a third party to do so, it’s a good idea to reach out to your custodian.

They can help you determine the best course of action. However, here are some common ways you may be able to determine the FMV of specific assets:

LLCs

Determining the value of an LLC requires an assessment of all assets in the LLC. This may include real estate owned by the LLC, brokerage accounts, equipment, etc.

Work with a CPA or other qualified third party to assess the value.

Real estate

If you hold real estate in your IRA, you can submit a comparative market analysis (CMA) or an opinion letter from a qualified third party may also be used. If you own real estate in a metro like Lincoln, New York, or Denver, hire a local appraiser to help you.

Unfortunately, these documents may not be adequate if you need to take an RMD.

If you’ve reached 72 (70 ½ if you reach 70 ½ before January 1) and are required to take a distribution, you’ll likely need a real estate appraisal to determine the FMV.

Private placements

Like other assets, private placement values are determined by a qualified third party.

To determine the value of this asset, you’ll likely need additional documentation, such as a statement from the entity, a final Schedule K-1, or documentation from an investment entity that outlines the asset’s value.

How to value a worthless asset

If you feel an asset is worthless, contact your custodian to have them removed from your account. In most cases, you do not need a third-party evaluation to validate the loss.

Still, you may need additional documentation, such as a tax deed or Form 1099-C, to remove the asset from your portfolio.

The value of your IRA account plays a vital role in your long-term goals and your immediate IRS obligations.

If you have a self-directed IRA, you’ll need to determine the FMV for every asset in your portfolio. Depending on the asset, this may require specific paperwork or qualified third parties.

Horizon Trust can help you with per-asset guidance that will help you properly determine the value of your IRA. Contact us today to prepare for the upcoming tax deadlines.