Fair Market Valuation Information
A fair market valuation is used to assign or change the value of an asset. New Direction requires that a fair market value be submitted on a yearly basis to ensure proper tax reporting. All IRA custodians are required to provide a year-end value for IRA accounts.
When completing the Fair Market Valuation form please follow these guidelines:
- The IRA owner will fill out the fair market valuation form, but the valuation may not be completed by the IRA owner OR a disqualified person.
- Because these valuations are used to determine the fair market value of a particular asset, an independent, neutral, qualified party must complete the valuation.
- This form must be sent back with supporting documents.
- Fair Market Values for assets held in accounts subject to Required Minimum Distributions must be as of December 31st of the prior year.
Examples of Supporting Documents:
Real Estate- An appraisal is acceptable but only necessary for accounts subject to Required Minimum Distributions and for a distribution or ROTH conversion request. A qualified real estate professional who is strickly “arms length” from both you and the investment may provide a comparative market analysis to meet the general annual valuation requirement. We understand that real estate agents may not provide appraisals but they are qualified to determine the market value of a property.
Single or Closely Held LLC- A value of each asset within the LLC is required in order to determine the value of the LLC. Real estate assets owned in an LLC must be evaluated by a third party using the same standards as if it were owned directly by the IRA. Other assets, such as bank or brokerage accounts should have year-end statements proving their value. If you need further guidance on how to determine the value of the LLC, consult your financial advisor. K-1s are not acceptable valuations because they represent the book value of the company which is based on historical cost less depreciation. There should be documentation proving that title to the LLC assets is in the LLC name. For accounts subject to Required Minimum Distributions and for a distribution or ROTH conversion request, the valuation must be provided by a third party.
Private Placements- You must contact the manager of the private placement and ask how you can obtain a value on the investment. The value must be provided by a third party for accounts subject to Required Minimum Distributions and for a distribution or ROTH conversion request. Supporting documentation must accompany the form.
Precious Metals- Clients are not required to provide valuations for precious metal investments. Values are derived from BullionValues.org.
Notes, Brokerage Accounts and Cash- These do NOT need a valuation as these investment values can be easily determined by annual statements or with a set face value.
Bankrupt/Receivership/Zero Value Assets- Please indicate this status on the valuation form and sign it yourself. Provide the documentation that will support the status. There are additional requirements for zeroing out an asset. Please contact our Client Relations department (firstname.lastname@example.org or 877-742-1270) for more information on a zero value asset.
Q: May I provide my own valuation of my IRAs assets?
A: No. For assets where fair market value cannot be determined and documented such as real estate and private placements this must be provided by a non-disqualified person to your IRA who has the expertise to provide a valuation.
Q: Who are disqualified persons?
A: Disqualified persons to your plan are:
- Your Spouse
- Your Ascendants
- Your Direct Descendants
- Your Direct Descendants’ Spouses
- Certain fiduciaries (CPAs, Attorneys, Financial Planners, etc.)
Q: Why do I have to provide a value now when I have not had this requirement in the past?
A: One of our requirements as your administrator is that you submit a fair market valuation of assets owned by your IRA annually.
The 5305-A, “IRA Custodial Account Agreement” states the following:
5.02 The Custodian or Administrator agrees to submit to the Internal Revenue Service (IRS) and Depositor the reports prescribed by the IRS. In the case of reports on form 5498, the Depositor agrees that Depositor is responsible for providing an annual report to Custodian or Administrator of the fair market value of all assets in any Custodial Account as of the last day of any calendar year, and that if Depositor fails to provide such fair market value information, that Custodian or Administrator shall issue a report on form 5498 to the IRS using the acquisition price of the assets in question. The IRS will be auditing self-directed IRA custodians in the near future and you will be required to provide satisfactory evidence of fair market value for us to file Form 5498 on behalf of your IRA. It is our job to maintain the tax-deferred status of the account by fulfilling this requirement.
Q: Is this only for self-directed IRA accounts?
A: No. All IRA custodians are required to provide a year-end value for IRA accounts. Unlike securities, where the value is easily determined by the market, non-traditional assets, real estate in particular, require individual valuation.
Q: Who pays for this valuation?
A: The IRA does. If your IRA does not contain sufficient funds to do so, you will have to make an annual contribution, transfer funds from another IRA or consult with your financial advisor on other alternative for paying for the service.
Q: Can I use this IRA asset valuation for the purposes of the Required Minimum Distribution?
A:You may use this valuation as long as it is an appraisal for real estate or third party valuation for non-real estate assets and the valuation is accompanied by adequate information supporting the value and a properly executed valuation form. The valuation must be as of December 31st of the prior year.
Q: What if I do not provide a valuation of the asset in my IRA?
A: Failure to provide a valuation may ultimately result in the distribution of your asset to you. Accounts that have shown no activity, including the valuation, cannot continue to be held by New Direction because we cannot meet the IRS requirement on updating the value and filing an accurate Form 5498 for your account.
Q: Can this valuation be used for in-kind (taxable) distributions and ROTH conversions?
A: Yes. The valuation must follow the same requirements for accounts subject to Required Minimum Distributions except that the valuation date must be as of the date of the distribution or conversion request or within a reasonable time period.
Q: Can you walk me through how to provide the valuation for my account?
A: No. This must be done by the IRA holder using the method they deem most appropriate. You are strongly encouraged to talk to your CPA, tax/legal advisor or other professionals in order to make the decisions on what needs to be done.
Q: My Valuation was rejected. Why?
A: There are several reasons we reject valuations. They are as follows:
• Lack of a signed valuation form
• Lack of documentation supporting value
• Incomplete Valuation Form/signature
• Valuation provided by IRA holder or other disqualified person.
Q: Do Roth Accounts need valuations even though they are tax free?
A: Yes, they do.