I purchased a private placement in an LLC through my self directed IRA. I am told I now need to have a form completed about the fair market value of the investment.
1. What is a practical way to comply with the form?
2. What happens if I can’t get the information to comply with the request?
The custodian is asking for the valuation because it influences the total value of the IRA reported on Form 5498 which is due to the IRS each May. The value of the private investment has to be reported in boxes 15a and 15b of Form 5498. You can view a form 5498 via the following:
Also, the IRS is in the process of providing more guidance regarding this annual valuation requirement. (see recent GAO Report: Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets)
The private investment sponsor is the one that will need to provide this valuation. The investment sponsor often-times will work with a third-party valuation company to perform the valuation for the entire private investment.
If the valuation is not provided, the IRA custodian may be forced to resign from your IRA or that particular investment, which means you would need to transfer it to another self-directed IRA or a self-directed solo 401k to avoid taxes and possibly penalties.