Fair market value (FMV) is the estimated market value of an asset. The fair market value assumes that both the buyer and the seller are knowledgeable and that neither is under coercion or pressure. An IRA is considered an asset, and you might be wondering: Do I have to report the fair market value of an IRA to the IRS?
What Is an FMV Account?
First, let’s explore FMV and the need to have an FMV account. What is an FMV account? If you have a self-directed IRA, you must report the FMV of the account to the IRS each year.
An FMV account is one that is subject to the required reporting. This can be in the form of converting an asset to a Roth IRA, withdrawing assets and transferring a Roth IRA to another account.
Reporting FMV to the IRS
Are IRA balances reported to the IRS? The FMV of every IRA in the United States is reported to the IRS using form 5498. For most people, the investment provider files this form every year on your behalf.
You will receive a form 1099-R from the provider and must report it according to the 1040 instructions. In some cases, you might be exempt from reporting, and you must check the form 1040 instructions to find out. If you are managing your own IRA, you must file this form every year.
You have to file form 5498 every year, but you do not have to report it on your tax return until you start taking distributions. This is a record that you should never discard because you will need it in the future.
Do you have to report the fair market value of an IRA? Yes, you or the account provider must report any payments, disbursements and the fair market value of the asset. If you have other assets like real estate, stock or bonds, there are special instructions for combining the FMV of all assets that you own.
Determining Fair Market Value
Do I have to report form 5498 on my tax return? If you have a self-directed IRA, you will need to submit form 5498 at the scheduled time. The filing deadline for filing form 5498 does not necessarily coincide with the regular deadline for reporting your taxes. The filing deadline depends on if you are an account provider or have a self-directed IRA.
In addition to the fair market value of an IRA, tax returns also must be submitted with supporting documentation of how you determined the FMV. For most IRAs, this involves a balance sheet. It might also require bank statements or investment account statements.
If you have a self-directed IRA, you are not allowed to assign the FMV yourself. You must find an independent person who is not related to you do it. This can include a CPA, financial planner or attorney. If you use a tax professional, they will usually take care of this for you.
If you must pay for the expense of hiring someone to do this, your IRA should pay the cost, but you are not personally allowed to pay for it. The rules for submitting form 5498 are complex, and you must take them into consideration if you are considering a self-directed IRA.
Reporting the FMV is important, especially for those who are required to take the required minimum distribution. The IRS uses the FMV as the basis for determining if you owe any taxes on the asset and how much. Instructions and form 5498 can be found on the IRS website.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.