Why do I need an IRA valuation of the assets in my account?

The Internal Revenue Service (“IRS”) requires that a fair market value be determined for all IRA assets, including those assets that are not publicly traded. The fair market value of all IRA assets must be reported to the IRS annually. These values are reported to the IRS on Form 5498. The IRS requires an IRA valuation in order to track and prevent tax avoidance through asset undervaluation.

What types of assets need a fair market valuation?

All assets held in IRA accounts must be valued at fair market value on an annual basis. For traded securities like stocks and bonds held in IRA accounts, these valuations are relatively simple to obtain by the IRA Trustee or IRA Custodian. Many investors, usually through self-directed IRA accounts, hold alternative assets that are not publicly traded. The valuation process for these assets can be more complicated. Alternative assets can include, but are not limited to, private equity, real estate partnerships, other private partnerships, oil and gas interests, mineral interests, and shares of stock of a closely-held or private company.

What are the risks of not getting a proper IRA valuation of the assets in my account?

The Internal Revenue Service (“IRS”) is aware of IRA valuation abuses. Over the years the IRS has taken steps to address these abuses. In 2013, the IRS modified its Form 5498 to increase the reporting requirements for hard-to-value IRA assets. In addition, the IRS has always required that values of alternative assets be supported by financial statements and valuation reports from third-party experts. The IRS continues to pursue this issue diligently and has in the past convened a working group to study ways of improving compliance and enforcement in this area.

The IRS specifically requires all IRA assets to be fairly valued for Roth IRA conversions, for in-kind distributions, as well as for purposes of calculating required minimum distributions. However, it is important for IRA owners to have properly completed and well supported valuation reports for hard-to-value assets every year, not just the year in which a Roth conversion, in-kind distribution, or required minimum distribution takes place. The IRS has in the past required prior years valuation reports in order to analyze the changes in value of hard-to-value assets in the years prior to a conversion or distribution.

An improper IRA valuation or an IRA valuation that is not well documented carries the risk of an assessment of additional income tax as well as related interest and penalties.

What type of IRA valuation company should complete the appraisal of my IRA assets?

The Internal Revenue Service (“IRS”) requires that the annual valuations be completed by a qualified, independent, third-party IRA valuation expert or company. Qualified, independent, third-party valuation experts must be at arm’s-length from both you and the investment. Valuations provided by the General Partner or Manager of the alternative investment are not considered independent and do not meet the IRS requirements. J&M Asset Management, Ltd is a qualified, independent, third-party expert with over 80 collective years of experience in providing valuations of privately held alternative assets.

How do I get a third-party IRA valuation of my IRA assets?

A qualified, independent, third-party IRA valuation expert should be hired to complete the valuation of the alternative assets in your IRA account.  J&M Asset Management, Ltd has been providing valuations of alternative assets to individuals, custodians and trust companies for over 20 years.  We have long-term contracts with many financial institutions, both large and small.  Our valuation reports have been reviewed and found credible by the Internal Revenue Service.

Give us a call, 630.790.4205, send us an email, info@jmasset.com, or fill out the form on our contact page and we can answer your questions and give you a quote.

What are the key dates for the annual IRA valuation of my assets?

IRA Trustees and Custodians are required to report the values of IRA assets annually on IRS Form 5498.  The IRS Form 5498 has a due date of May 31st.  IRA Trustees and Custodians have different due dates for the valuation reports of the alternative assets held in their client’s IRA accounts.  IRA account holders should check with their Trustees or Custodians.  However, in most cases valuation reports of alternative assets showing the values as of December 31st are due sometime in January to March of the following year.

What type of valuation is needed for my IRA assets?

The most widely recognized and accepted standard of value is fair market value. Fair market value is the standard that applies to all federal and state tax matters. It is also the legal standard of value in many other valuation situations.

Internal Revenue Service Revenue Ruling 59-60 defines fair market value as the cash price at which property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.

All of the valuations prepared by J & M Asset Management, Ltd. are prepared in accordance with the standards, guidelines, methods and procedures outlined in Revenue Ruling 59-60. Our valuation reports are thorough, well documented, and supported by financial statements and exhibits.

What are the valuation concerns when converting a traditional IRA that holds alternative assets to a Roth IRA?

The Internal Revenue Service (“IRS”) requires that the assets held in a traditional IRA be valued at the time of the IRA’s conversion into a Roth IRA. The amount of the conversion is generally considered taxable income in the year of the conversion. For alternative assets, a fair market value must be determined by a qualified, independent, third-party valuation expert. There are both risks and opportunities in determining the fair market value of alternative assets held by an IRA.

The amount of taxable income from a Roth conversion is based on the fair market value of the IRA assets subject to the conversion. The lower the fair market value, the lower the taxes due. In addition to arriving at an appropriate and supportable value for the entity being valued, a qualified valuation firm can determine the appropriate lack of control and lack of marketability discounts to apply to the ownership of an alternative asset. J&M has years of experience in valuing business enterprises as well as in determining and defending appropriate discounts, potentially saving the IRA holder thousands of dollars in taxes.

The IRS is keenly aware that Roth IRA conversions present an opportunity for their holders to avoid taxes through asset undervaluation. As such, the IRS requires that a written valuation report be prepared by a qualified, independent, third party valuation firm to document the fair market value of any alternative assets held by the IRA at the time of the conversion. The detailed, written valuation report should use standard valuation methodology that considers historical financial results, projections, market conditions and other factors in arriving at a fair market value for the alternative assets. In addition, the IRS may require prior years valuation reports to analyze the changes in value of hard to value assets in the years prior to the conversion. If the amounts reported on an income tax return are later adjusted by the IRS and a tax increase results, an additional penalty may apply. This penalty of up to 40% of the increase in tax is due in the case of substantial understatement of tax, substantial valuation misstatements, or negligence or disregard of rules or regulations.

Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Please consult your own tax advisor before engaging in any transaction.