The Upside of Fair Market Valuation for Savvy Investors

Estimated Reading Time: 4 minutes

If you’ve never reported the fair market valuation (FMV) of your self-directed IRA (SDIRA), the process might seem intimidating. It takes time and depending on your situation, you may have to enlist a third party to complete the valuation. 

Fortunately, reporting an FMV is straightforward and brings numerous benefits for you as an investor.

What is Fair Market Valuation?

The fair market value of an asset is what an informed and unpressured buyer would pay an informed and unpressured seller for an asset in the current market. 

People use FMV to value all kinds of assets, including divorce settlements, insurance coverage, and even cases of eminent domain. The IRS uses FMV to assess the value of SDIRAs. This helps them keep track of the assets held in your account.

They require that an FMV of each asset held in an SDIRA be provided:

• Annually based on the value of the asset as of December 31
• Whenever an SDIRA undergoes a taxable event, like taking an in-kind distribution
• To indicate that an asset is worthless and can be removed from your account

Why Do I Have To Report an FMV For my SDIRA?

Most publicly traded assets held in investment accounts have values that are easily determined by the going rate on the market. 

If you try and sell Kodak stock for an inflated price due to its “sentimental value,” you’re not going to find many takers. Therefore, publicly traded assets like stocks, bonds, cash, and precious metals do not require your submission of an FMV.

On the other hand, the value of some alternative investments isn’t always easy to assess. Take real estate, for example. A property’s value depends on multiple different factors, like improvements to the asset, upgrades to the surrounding area, changes in market conditions, and countless more. 

Did your real estate investment appreciate or depreciate in value this year? What about your piece of private equity in that high-risk biotech company? The IRS doesn’t have the bandwidth or infrastructure to make that determination, so the responsibility lies with the SDIRA holder.

Without an FMV, there is no way for you or the IRS to know what your investment is worth at any given time. 

That might seem like no big deal, but without a value, the IRS cannot calculate your required minimum distribution (RMD) or your liability for a taxable event like an in-kind distribution or a Roth conversion.

Do I Have to Report an FMV For Every Asset?

No. If an asset is publicly traded (like stocks, bonds, or precious metals), you do not need to report an FMV. 

Additionally, if an asset has not changed in value since your last fair market valuation statement, you do not need to report an FMV for this year. Entrust will report the last known value of the account to the IRS.

How Could FMV Benefit Me? 

Aside from fulfilling an IRS requirement, reporting your FMV can help you better coordinate your investing strategy. 

Accurate Taxes and Penalties

Without knowing an accurate account value, you may be paying too much or too little in taxes or penalties, both of which should be avoided if possible.

If you pay too much in tax, you’re essentially giving an interest-free loan to the government.  Pay too little, and the IRS may come back to collect unpaid taxes, disrupting your investment strategy.

Filing a timely FMV ensures that you are paying the right amount of tax and helps you avoid any unnecessary charges.

Planning Your Investment Strategy

Knowing the value of your assets is also an integral part of implementing your investment strategy. You can more easily plan your distributions and be aware of the taxes you might encounter during a taxable event.

Meeting Your Investment Goals

Without keeping track of your investment portfolio’s growth, you cannot assess how your alternative investments are performing. 

By keeping a close eye on your SDIRA and providing a yearly FMV, you are much better positioned to optimize your investments and make strategic moves that move you toward your retirement goals.

How Do I Complete My FMV?

At Entrust we want to make it as easy as possible for you to submit your FMV so that you can keep up-to-date with your portfolio’s growth and fluctuations. 

We have a detailed FMV Instruction Page to help you get everything completed easily by our January 31 deadline. In this short guide, we walk you through the types of documentation you need to provide for each type of asset, and information about third-party valuators you may need to use. It also has a robust FAQ section for any issues you might encounter along the way. 

As the recordkeeper and administrator of your SDIRA, Entrust is required to provide the value of your account as of December 31 to the IRS each year. After we have received your FMV, we will file Form 5498 for your SDIRA. This form notifies the IRS of any contributions you made for the year, RMDs taken from the account, and the new FMV of your SDIRA. We will provide a copy for you to keep with your tax records. 

All in all, reporting your FMV keeps your account in good standing and helps you better plan your long-term investing strategy. Think of it like an extended check-in on the assets in your portfolio. There is nothing better than that feeling of knowing exactly how your game plan is paying off.

Ready to get started on your FMV? Log in to the Entrust Client Portal or download our FMV form. After completing your FMV for the year, you can get right back to investing and managing your SDIRA.