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Annual Reporting Requirements for IRAs and 401(k)s

IRAs must report its fair market value to the IRS annually. Fair market value is reported to the IRS by your IRA custodian via IRS Form 5498. For brokerage IRAs holding stocks, bonds and mutual funds, the values are automatically determined from the close of the market on December 31st each year.

Determination of Fair Market Value

The Fair Market Value of an investment has been broadly defined by the Court as:
“The price at which property would change hands between a hypothetical willing buyer and a hypothetical willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.”

In-Kind Distributions

Many people believe that when they take distributions from their IRA or 401(k), they must take out cash. This isn’t the case. You can distribute assets, or even parts of assets. You could have an LLC in your retirement account that owns one or more investments. You can distribute any of those assets, or even distribute a portion of the LLC itself.

Not Reporting The Fair Market Value to Your Custodian

Likely the worst thing that can happen to you if you don’t report the fair market value of your IRA assets to your custodian is that they may charge you a fee. Now the funny thing about this fee is that there is no real cost to a custodian for not receiving your valuation.

Note Valuations

Now could be the best time to convert private loans made with your IRA to a Roth IRA since 1998, when it first became possible.

Roth Conversions

Fair market value is used when converting an entire account, or a particular investment or portion of the account, from a Traditional IRA to a Roth IRA. This is also the case for a Solo 401(k). Because this is a taxable event, your custodian will likely require you to provide supporting documentation on your stated value.

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