Fair Market Valuations in Your IRA

Fair Market Valuations (FMVs) are an annual requirement set forth by the IRS to determine the value of the assets in your IRA. An FMV is calculated based on the current price of comparable assets, and how much a knowledgeable and willing buyer would reasonably pay for that asset if it were sold that day, no matter if it’s a real estate property, an LLC, or a private placement. Some Retirement account providers are required to report the FMV of accounts as of December 31st each year to the IRS and must provide the account holder with the same information by January 31st the following month.

FMVs are typically used to determine what the account holder is required to take out in minimum required distributions (RMDs) once they reach 70.5 years old. RMDs are calculated based on the total amount in the account and the life expectancy of the account holder. The account holder must take a certain percentage each year by December 31st or be penalized. Inherited IRAs may also require RMDs regardless of age.

How FMVs are Performed

First, a qualified and independent third-party must perform the valuation. This party can be a certified appraiser, a licensed real estate professional (in the case of real estate property), or a financial expert (such as an attorney, CPA, or financial planner). However, the party cannot be a disqualified person, such as a relative or someone who gains to benefit from the valuation of your account assets.

An unsigned appraisal report is sufficient if the appraisal is required. If it’s not required, then a third-party evaluator must verify the form with a signature and date. While valuations don’t always come with a cost, the funds must come from the retirement account if payment is needed. Personal checks and cash aren’t allowed as viable means of payment. If the account doesn’t have enough free cash to cover the cost, the plan owner must make a contribution, transfer, or rollover to pay for the service.

Tips to Know About FMVs

  • You must obtain separate valuations for each asset in your account. For instance, if you have real estate and private placement investments through your IRA, you must perform two separate valuations.
  • The worth of the assets is determined based on the fair market value at the time of the assessment, not how much you paid for the asset. The FMV could be more or less than the original cost of the asset.
  • As of December 31st of the reporting year is when values are assigned.
  • The FMV form must be signed and dated by the account holder.
  • FMVs are also required when taking an asset distribution, converting an asset, or recharacterizing an asset.
  • Precious metals, brokerage accounts, and publicly traded assets and cash do not require an FMV because the market automatically determines the cost. Statements that include the unit/share balances can be used for the valuation of these types of investments.

To complete a Fair Market Valuation form online, click here. You may need to produce supporting documents, including a Comparative Market Analysis for real estate properties.

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