IRA owners often want to invest in assets other than the usual stocks, bonds, cash, and mutual funds. The tax code does allow for IRAs to invest in most anything except for collectibles, life insurance, and S-corporation stock. So what do those “other assets” make your IRA worth?
If you invest $1,000 in a publicly traded stock it’s simple to determine the value of the investment at any time. You can look it up on your computer, smart phone, or tablet. But investing in real estate, promissory notes, a start-up business, a master limited partnership, an LLC, or any other investment option, it’s not easy to determine its investment value. Typically, the IRA custodian carries the investment on its books as the amount you originally invested. The value doesn’t change from year to year.
This is great if the investment goes up in value because you are paying the custodian less in fees and your RMDs and subsequent taxation will be less, but what happens when it does not? If your investment totally tanks and its value, so you are told or suspect, goes to zero?
You can’t just tell the IRA custodian that the investment is worthless and not going to work. You must have proof and need an outside, impartial appraisal of the value of the asset. This is a cost to the IRA. You cannot pay for the appraisal; the IRA must pay for it.
Having the IRA custodian distribute the asset to you also has its problems. When an IRA asset is distributed in kind, the custodian must issue a 1099-R to the IRA owner showing the value of the asset on the date of distribution. Since the value on the IRA custodian’s books is the amount of the original investment, that is the value they will put on the 1099-R. The IRS gets a copy of that 1099-R. The IRS will expect you to include that amount in your income and to pay income tax on it.
You can tell the IRS that the asset is worth nothing but you will need proof. The responsibility is on the IRA owner to show what the real value of the asset is.
What is your IRA worth? It is worth what the IRA custodian puts on the 1099-R that goes to IRS, unless you can prove otherwise.