What is the IRS Code for an IRA?
An IRA can hold many different assets; however, its custodian may place restrictions on which investments it allows. Alternative investments such as real estate, private mortgages, oil and gas limited partnerships, precious metals or horses may require more specialized knowledge for proper management.
IRAs may invest in collectibles such as art, rugs, antiques and metals. Any cost incurred from investing in such collectibles would count as taxable distribution.
What is the Fair Market Value (FMV) of an IRA?
Your IRA custodian must annually send you a Fair Market Value statement of your IRA assets so that you can calculate and adjust your required minimum distribution (RMD). This allows for accurate accounting and distributions.
FMV refers to the estimated value of assets at which both willing buyers and willing sellers would exchange an asset in the open market, so if you own hard-to-price assets such as real estate, an SDIRA LLC, or promissory notes which require valuation by an expert third party for verification purposes then working with one is recommended for accuracy of valuation as well as supporting documentation.
Information gathered through an FMV valuation is reported on IRS Form 5498 by your IRA custodian and sent both to you and to the IRS by January 31 of the following year. It also serves as a record of conversion events; use codes 1, 2, 3, 4, 5 and 8 when reporting these types of conversions; only code J (Loans treated as distributions under section 72(p) should be utilized if a valid Physician’s Statement exists.)
How do I report the FMV of an IRA?
Your IRA custodian should provide an annual fair market value assessment of all of your IRA assets. This valuation will be reported on IRS Form 5498 by your custodian; standard investments like stocks, mutual funds and precious metals can easily be determined using current price; for more complex self-directed IRA investments such as real estate or promissory notes the values may require independent third party valuations.
Use Code 7 when reporting a normal distribution from an IRA, with Code 1 applicable if an individual aged 59 1/2 or over modified the payments prior to starting their five-year period, and Code 2 applied if they qualify for an exception to penalty tax. Code K should be used when dispersing traditional IRA assets that don’t readily available fair market values such as those listed below:
How do I report the FMV of an LLC or entity in my IRA?
Custodians of individual retirement accounts must submit annual fair market valuations on IRS Form 5498. Standard IRAs holding stocks or mutual funds may use end-of-year prices for each account to accomplish this, while for self-directed IRAs holding investments such as private investment funds or real estate it may be necessary to get an independent third party opinion of value for each asset held within each IRA account.
Code K should be entered for traditional or SIMPLE IRA distributions which are actual distributions (not rollovers) but where participants cannot reasonably determine the taxable amount due to lack of available FMV, such as ownership in an entity holding real estate such as a corporation holding property or partnership holding real property. Refer to 2020 instructions for Form 1099-R and 5498 for further guidance in reporting such distributions.
How do I report the FMV of a real estate asset in my IRA?
IRS rules dictate that when an IRA invests in alternative investments such as real estate or private placements, its Fair Market Value (FMV) may be difficult to ascertain. As part of their duties as custodian of such accounts, an annual Form 5498 report must include FMV reports of all assets held within an IRA – even those that provide easily accessible FMV estimates, like time deposits, bonds, government securities and mutual funds.
For investments that do not readily have an estimated fair market value (FMV), such as real estate or private placements, an IRA custodian must entrust an independent third party such as an appraiser, broker or CPA to provide valuation. These specialists often also serve as attorneys or financial planners.
An annual valuation report must be provided to your IRA custodian using IRS Form 5498 by May 31 of each year, and submitted along with your tax return. Your IRA Innovations account administrator can help determine the most efficient method for valuing your particular investment and which individuals or firms are qualified to perform a valuation service.