Entrust Learning Center > 8 IRA Insights > Converting Assets in Your Self-Directed IRA

Converting Assets in Your Self-Directed IRA

By: Scott Maurer

IRA & 401(k) Insights

Many people are aware of the new changes in the tax code for 2010 that allow any individual, regardless of income level, to convert the assets in a Traditional IRA to a Roth IRA. When converting assets held within a self-directed IRA, there are two main requirements that your local Entrust office will need to complete the conversion. The first is an updated valuation of the assets, and the second is the documentation that transfers ownership of the assets from the Traditional IRA to the new Roth IRA.

Obtaining the Proper Valuation

When you convert assets within a Traditional IRA to a Roth IRA, Entrust must report the fair market value (FMV) of the assets to the IRS. The IRS definition of FMV is the price at which the asset would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts. (For additional guidance to determine FMV, see Internal Revenue Code 2512 and Department of Treasury Regulations 25.2512.1-6.)

When dealing in cash or securities that are publicly traded, the process is very simple—the custodian or administrator can simply look at the publicly traded markets to obtain a value on the day of the conversion. However, when dealing with many of the types of assets that are held within a self-directed IRA, determining the true FMV is not as clear-cut. In these cases, a qualified, independent third party should determine the FMV of the assets being converted. Listed below are some commonly held assets and the type of valuation that might be required.

Real Estate—Have the property appraised by a qualified real estate appraiser around the time the conversion is to occur to obtain a timely FMV. Because the real estate market fluctuates continuously, the value reflected in an appraisal done in January can be substantially different from an appraisal done in November. The appraisal must be paid for by the IRA as an expense.

Loans—In most cases, the FMV of a loan is equal to the outstanding principal plus any unpaid interest as of the date of the conversion. Other factors that can impact the FMV of a note include the payment history and credit worthiness of the borrower, the interest rate in comparison to current market interest rates, and the underlying value of any collateral. If the FMV of the note is not equal to the outstanding principal plus accrued interest, you should have an independent third party (perhaps an attorney, accountant, or appraiser) examine the payment history and terms of the note and provide the IRA administrator with the appropriate FMV to use in converting the loan.

Corporations, Partnerships, and LLCs—For valuing an interest in a private placement entity in which the IRA is an investor, the manager, president, or other officer of the entity might be qualified to provide the FMV of the IRA holding. As with valuing real estate, the valuation date should be reasonably close in time to the conversion because the value of the entities could fluctuate and affect the value of the IRA’s interest.

For an interest in an entity in which an officer or manager is not qualified to provide the FMV, consult with a qualified, independent third party, such as a CPA or other business valuation expert to value the IRA’s interest within the LLC and possibly the value of the underlying assets in the LLC as well.

FOREX and Precious Metals—Holdings in FOREX accounts and precious metals are easier than other assets to value because the value is tied to a public market. To convert a FOREX account, Entrust requires a current statement on the day of the conversion because the value fluctuates on a daily basis. For precious metals, Entrust uses the value as determined by the precious metals market.

If your IRA holds an asset that does not fall into the categories listed above, contact your local Entrust office for guidance on how to assess the value for conversion purposes and what type of documentation you need. In general, the valuation must be done by a qualified, independent third party.

Submitting the Documentation

After you have obtained the proper valuation of the assets, the next step is to submit the necessary forms and documentation for the conversion to your local Entrust office. There are four main items that the Entrust office needs to convert the assets.

Roth Application—Unless you already have a Roth IRA account established with Entrust, you must fill out an application to open a Roth IRA. You can obtain the forms from a local office. After you submit the original, signed application and fee disclosure form, your Entrust office will give you the new account number, and you can begin the process of converting the assets.

Traditional to Roth Conversion Form—This form identifies the assets to be converted. You can obtain the form from your Entrust office or download it from the Entrust website.

Valuation Documentation—When submitting the Traditional to Roth Conversion Form, you must also submit the necessary documentation that reflects the current FMV of the asset.

Transfer Documents— The type of investment determines which documents are needed to transfer the ownership of the asset from the Traditional IRA to the Roth IRA. For instance, when converting real estate, you must have a deed prepared that transfers property from the Traditional IRA to the Roth IRA. With mortgages, promissory notes, and private placements, it might be necessary to have an assignment drafted that transfers the interest in the asset from the Traditional to the Roth IRA. However, with any asset, first consult with your Entrust office to determine which documentation is needed and to make sure that the document (whether a deed, an assignment, or otherwise) is properly worded. An Entrust representative also needs to execute any transfer document.

Converting a Traditional IRA and its assets to a Roth IRA is not a difficult process, but it is very important that the conversion is properly documented and that accurate valuations are obtained. If you have any questions, contact your Entrust office so that they can assist you in the process.

Scott Maurer is an attorney and the director of education andmarketing for Entrust of Tampa Bay, LLC. He can be reached at SMaurer@TheEntrustGroup.com or 800-425-0653 ext 1123.