The Upside of Fair Market Valuation for Savvy Investors

Estimated Reading Time: 4 minutes

We get it. You don’t need one more end-of-year task, and it can be frustrating to report the Fair Market Valuation (FMV) for your Self-Directed IRA (SDIRA). It takes time and sometimes you even have to pay someone to complete the valuation. 

But understanding the benefits of FMV for you as an investor is an exciting part of managing your SDIRA. 

What is Fair Market Valuation?

FMV is determined based on 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 for everything from divorce settlements to eminent domain situations and insurance coverage. 

The IRS uses FMV to assess the value of SDIRAs. They require that an FMV of each asset held in a SDIRA be provided:

• annually based on the value of the asset as of December 31st.
• whenever a SDIRA undergoes a taxable event.
• to indicate that an asset is worthless and can be removed from your account.

Another way the IRS uses FMV is to assess taxation for a variety of transactions such as company sales and donations. 

I’ve never had to report FMV for any other investment account? Why do I have to do this for my SDIRA? 

Most assets held in investment accounts (stocks, bonds, cash, precious metals) have values that can easily be determined by the market, therefore, they do not require your submission of an FMV. Publicly-traded investment accounts may also be valued on a regular basis thanks to year-end statements. 

But the value of alternative investments is not always easy to assess. Did your real estate investment go up or down this year? What about an investment in a company that doesn’t produce regular statements? Maybe you invested in a food truck or a horse. Is it worth more or less than when you invested? 

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 converting a traditional IRA to a Roth IRA. Not unlike many of the other rules associated with SDIRAs, this is one that has benefits beyond keeping your account in good standing.

How could FMV benefit me? 

FMV has more benefits for investors than just fulfilling an IRS requirement. 

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 are not good for you. An FMV ensures that you are paying the right amount of tax and helps you avoid any future penalties.

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 31st deadline. The guide walks you through the types of documentation you need to provide for each type of asset, and it provides 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 31st to the IRS each year. After you submit your FMV to us, we file Form 5498 for your IRA. This form is used to notify the IRS of contributions, minimum required distributions, and the FMV of your SDIRA. We will provide a copy for you to keep with your tax records. 

There’s no doubt that reporting your FMV is good for you and your long-term strategy. Even though it takes a few more steps, you can think of it like logging in and checking how your account is doing. There is nothing better than that feeling of knowing exactly how your investment strategy is paying off.

Login to the Entrust Client Portal or download our FMV form to get your FMV started. Then you can get right back to investing and managing your SDIRA, knowing where you stand and how to get where you want to go.