Annual Asset Valuation Requirements (FYE)

What is Fair Market Value (FMV)?

Fair Market Value (FMV) refers to the total monetary worth of all assets held within your IRA based on their market price as of December 31st of each year. The FMV is a critical component of retirement account management, particularly for Self-Directed IRAs (SDIRAs), where more complex and diverse asset types are often involved.

Why is FMV Important?

Accurately determining and reporting FMV helps you and your custodian:

• Meet IRS reporting requirements.
• Complete Form 5498, which details the value of your IRA.
• Ensure compliance with the Employee Retirement Income Security Act (ERISA).
• Calculate required minimum distributions (RMDs) when applicable.

IRS Reporting: Form 5498

Each year, your IRA custodian is required to submit Form 5498 to the IRS and provide you with a copy. This form includes essential details such as:

• The FMV of your account (Box 5) as of December 31.
• The type of IRA account(s) you hold.
• Contributions made during the year.
• Any distributions taken.

This form must be filed by May 31 each year, and while your custodian completes and submits it, you should keep a copy for your records.

Valuation Requirements for SDIRAs

Unlike traditional IRAs with easily valued assets like stocks or mutual funds, SDIRAs often include complex assets such as real estate, LLCs, and private placements. Properly valuing these assets may require additional documentation or third-party assessments. See examples of acceptable documentation below. 

Types of Assets and Valuation Methods

• Private Stocks:
  • A statement from the company confirming the number of shares held and any relevant information about the company's financial health. 
     
  • Audited financial statements of the private company
• Real Estate:
  • A comparative market analysis (CMA) or an appraisal from a qualified third party, such as a licensed real estate appraiser, may be required.
  • If RMDs are necessary, a formal appraisal is often mandated.
• LLCs:
  • The value of an LLC must reflect the worth of all assets it holds, such as real estate, equipment, or brokerage accounts.
  • A CPA or qualified third party can help assess the overall value.
• Private Placements:
  • Documentation may include statements from the entity, a final Schedule K-1, or reports outlining the asset’s current value.
• Promissory Notes:
  • An independent valuation or documentation showing the outstanding balance is often required.

Independent Third-Party Valuations

In many cases, the valuation of complex assets will require assistance from independent third parties. Qualified evaluators may include:

• Certified appraisers
• Licensed real estate agents or brokers
• CPAs
• Attorneys
• Independent valuation companies

Costs and Compliance

• The IRA (not the account holder) must pay for the valuation services (if required) to avoid prohibited transactions.
• Account holders cannot conduct business with a disqualified person, which includes themselves, certain family members, or related entities.

Valuing a Worthless Asset

If an asset held within your SDIRA becomes worthless, you can request its removal from your account. In most cases, a formal third-party evaluation isn’t necessary. However, supporting documentation, such as a tax deed or other instrument, may be required.

FMV and Required Minimum Distributions (RMDs)

If you hold a Traditional IRA and have reached the age of 72 (or 70 ½ if you reached that age before January 1, 2020), you must begin taking RMDs. The amount is calculated based on the total FMV of your account, your age, and IRS life expectancy tables. Properly valuing all assets ensures accurate RMD calculations.

Steps to Determine FMV for Your SDIRA

1. Gather Documentation: Collect all relevant statements and reports for each asset.
2. Identify Valuation Requirements: Determine which assets need a third-party valuation.
3. Engage Qualified Professionals: Work with appropriate evaluators for complex assets, if required.
4. Submit Valuation Information: Provide FMV documentation to your custodian through their designated process.

Conclusion

Understanding and accurately reporting FMV for your Self-Directed IRA is essential for maintaining compliance and maximizing the benefits of your retirement account. By following proper valuation procedures and working with qualified professionals, you can ensure that your SDIRA remains a powerful tool for long-term financial growth.

For further assistance or guidance on valuing your SDIRA assets, consult your administrator or a financial professional.