As we near the end of the year, if you’ve invested in a Self-Directed IRA, it’s time to start thinking about the annual required task of filling out a Fair Market Valuation form (FMV) for each asset in your account.
This annual task is so important for Self-Directed IRAs, and we’re here to help you every step of the way, so you know exactly what to do and why. Now is the time to get started!
Why do we have to fill out fair market valuation forms?
We hear this question often: “Why do we have to do this every year?” The answer is simple. In IRC Regulation 4975, the IRS states that assets must be valued at the end of each year by a qualified, independent third party. This is an annual requirement by the IRS for assets in your retirement account. The valuation is based on the fair market value of the asset at the time of the assessment.
But why does the IRS require this? There are two reasons:
- If you have reached the age of 72 and are at the point of taking required minimum distributions, there must be a value associated with each asset in your IRA in order to know what the Required Minimum Distribution (RMD) should be.
- Secondly, since this asset value information is collected each year (valued on December 31st of each year), it can be tracked over time to determine useful insights and trends about retirement accounts. Collectively providing this information helps answer important questions about the value of accounts, what is being done with them, and when account-holders will be able to retire. Fair market valuation is the process through which much of the data surrounding these questions is collected, aggregated, and understood.
Who are qualified independent third parties?
An important part of fair market valuation is finding the qualified, independent third party to provide a fair valuation and supporting documentation. This person or entity must not be a disqualified person to your IRA. We need this value on a per asset basis, not an account basis. So if you have three assets in your account, such as three real estate holdings, you need three valuation forms. And since each asset may be different, you may need to utilize different resources for your assessments, such as:
- Licensed real estate professionals (broker license option letters or comparables; “comps”)
- County property appraiser (can get from yearly tax bill)
- Certified property appraiser
- Independent valuation firm
- Certified Public Accountant (CPA)
- Auditor
- Last trade price of asset (works well for assets such as private stock and livestock)
- Attorney
- Managing partners of the company
- Company Financial Officer
- Loan servicer
With each fair market valuation form, you will also need to provide supporting documents to further verify the value. If payment is required for a valuation, the expense must be paid by the IRA that made the investment and not you personally. Each FMV form must be signed by the client and by the person or entity performing the valuation.
What happens next to value the assets in your IRA?
When you have all of your documentation and your FMV form completed, you’ll need to mail, fax, or scan it to IRA Innovations by January 20th of the following year. We make necessary updates to your account so we have the most recent, accurate information on file.
The asset values as of December 31st must then be sent to the IRS. We do this by sending in IRS Form 5498 by the end of May of the following year. No one sees this information except you as the account holder, the IRS, and IRA Innovations as your account administrator.
When it comes to fair market valuation, IRA Innovations is here to help you as much as possible with this annual task. The time to start thinking about the process is now, while there is time left in the year to get everything done. Start by finding the right qualified, independent third party to help you fill out the form, send the documentation to us by the deadline, and we will handle the rest.
Read more about the benefits of Self-Directed IRAs, and let us know if you would like to learn more!
IRA Innovations provides self-directed retirement account administration and education in Birmingham, AL, Tuscaloosa, AL, and Nashville, TN. As the experts when it comes to non-traditional investments including real estate, private equities, precious metals, lending money, etc., IRA Innovations can provide the necessary tools and information to get started with a Self-Directed IRA. IRA Innovations does not endorse any products or sell any assets. IRA Innovations does not provide tax, legal, or investment advice. Please consult your legal, tax, or financial advisor for any advice you might require.
