11.4 Valuing Nontraditional Assets and Disclosing IRA Fees
Key Takeaways
IRA trustees and custodians must value every IRA asset at fair market value annually, including assets with no ready market.
The December 31 fair market value reported in Form 5498 Box 5 is the basis for the next year's RMD calculation.
Form 5498 Boxes 15a and 15b report the value and type code of hard-to-value assets such as private stock or real estate.
Treas. Reg. § 1.408-6 requires the disclosure statement to describe every charge that may be made against the account.
For variable investments, the financial disclosure must state that growth in value is neither guaranteed nor projected.
Why Valuation Is a Compliance Duty
For a CD or a mutual fund, the year-end value is a number the system already has. For a share of a private company, a mortgage note, or an interest in rental real estate, someone must determine it. The 2026 Form 5498 instructions are blunt: trustees and custodians are responsible for ensuring that all IRA assets, including those not traded on established markets or without a readily determinable market value, are valued annually at their fair market value (FMV). The value is not cosmetic. It drives several other rules:
| Use of the value | Why it matters |
|---|---|
| Annual FMV statement and Form 5498 Box 5 | Owners receive the December 31 value by January 31, and the IRS receives it by May 31 |
| Required minimum distributions | Next year's RMD equals the prior December 31 FMV divided by the life-expectancy factor; an understated value understates the RMD |
| Roth conversions and in-kind distributions | The taxable amount is the FMV of the property on the date it is distributed or converted |
| Excess contribution tax | The 6% tax under IRC § 4973 is capped at 6% of the account's FMV at year-end |
| Prohibited transactions and disqualification | A disqualified IRA is treated as distributing all of its assets at FMV on the first day of the year |
| Pro-rata basis recovery | Form 8606 uses the December 31 value of all traditional, SEP, and SIMPLE IRAs |
Reporting Hard-to-Value Assets: Boxes 15a and 15b
When an IRA holds certain specified assets, the trustee reports their FMV in Box 15a and a type code in Box 15b:
| Code | Asset type |
|---|---|
| A | Stock or other ownership interest in a corporation that is not readily tradable on an established securities market |
| B | Short- or long-term debt obligation that is not traded on an established securities market |
| C | Ownership interest in a limited liability company or similar entity (unless traded on an established securities market) |
| D | Real estate |
| E | Ownership interest in a partnership, trust, or similar entity (unless traded on an established securities market) |
| F | Option contract or similar product that is not offered for trade on an established option exchange |
| G | Other asset that does not have a readily available FMV |
| H | More than two types of assets (listed in A through G) are held in the IRA |
Practical Valuation Methods
The Code does not prescribe a single method, so self-directed custodians adopt written valuation policies. Common sources include:
- Issuer statements: annual net asset value statements from private funds or capital account values from a partnership's Schedule K-1;
- Independent appraisals for real estate, ideally by an appraiser with no relationship to the owner;
- Note valuations that reflect the payment history: a promissory note in default is not worth its face amount;
- Owner-provided values supported by documentation, with the custodian reserving the right to require an independent appraisal.
A value that is too high inflates RMDs and fees; a value that is too low understates RMDs and, for a Roth conversion of a hard-to-value asset, understates the taxable income. IRS examiners scrutinize low conversion values, and an owner who understates income can face accuracy-related penalties.
Nontraditional Investment Issues
Self-directed IRAs can hold many assets the Code does not prohibit, but each brings administrative risk that the custodian must manage:
- Acceptance policy: the Code does not require any custodian to hold an asset. A bank may decline real estate, private stock, or cryptocurrency because it cannot value or safeguard them.
- Prohibited-transaction screening: confirm that no disqualified person is on the other side of the purchase, lease, or loan (Chapter 11, Section 11.2).
- Title and custody: assets must be titled in the IRA's name (for example, "ABC Bank, Custodian FBO Lee IRA"), and permitted bullion must be held by the trustee or an approved depository.
- Expenses and income: property taxes, insurance, and repairs must be paid from IRA cash, and rent and note payments must flow back into the IRA, not to the owner.
- Unrelated business taxable income: debt-financed property and operating partnerships can require Form 990-T filings, with tax paid from IRA assets.
- Liquidity for RMDs: an owner whose only IRA asset is illiquid may need to take the RMD in kind or from another IRA under the aggregation rules.
Fee and Disclosure Rules
The Financial Disclosure Under Treas. Reg. § 1.408-6
The disclosure statement given at establishment must include a financial disclosure, which depends on the type of investment:
- Guaranteed or projectable growth (for example, a passbook savings account or a fixed-rate deposit): the statement shows the amounts available at the end of each of the first five years and at ages 60, 65, and 70, assuming $1,000 level annual contributions, and states whether those amounts are guaranteed or a projection with the rate used ((d)(4)(v)).
- Rollover-only accounts: the same style of figures based on a single $1,000 rollover ((d)(4)(vi)).
- Other investments such as mutual funds or variable products: a nontechnical description of each type of charge and its amount, the method for computing and allocating earnings, and a statement that growth in value is neither guaranteed nor projected ((d)(4)(vii)).
If a material adverse change in the disclosed information takes effect before the account is established or before the revocation period ends, the trustee must furnish an amendment (§ 1.408-6(d)(4)(ii)(B)). Later fee changes follow the notice terms in the IRA agreement.
Typical Self-Directed Fees and Who Pays Them
| Fee | Paid from | Note |
|---|---|---|
| Annual account or asset-holding fee | IRA or the owner's own funds | Rev. Rul. 84-146: separately billed trustee fees paid outside the IRA are not contributions |
| Appraisal fee | IRA or owner, per agreement | Treat consistently and document |
| Transaction fees and commissions | IRA | Paid outside the IRA, they are treated as contributions |
| Property expenses (taxes, repairs) | IRA only | Owner payment is a contribution and may be a prohibited transaction |
Bank Operations Scenario: Year-End Review of a Private Note
Dana's self-directed traditional IRA holds a $150,000 promissory note from an unrelated small business. The borrower stopped paying in June 2026, and the collateral appraisal shows recoverable value of about $60,000. At year-end, the custodian's valuation policy requires Dana to supply a supported value. Based on the appraisal and payment history, the custodian reports $60,000 in Box 5 and Box 15a with code B, instead of the face amount. Dana, who turns 74 in 2027, will owe a 2027 RMD based on the lower value. The custodian documents the source of the value in the account file and notes that if Dana later converts the note to a Roth IRA, the taxable amount will be the note's FMV on the conversion date.
A self-directed IRA holds an interest in a private real estate LLC that does not trade on any market. At year-end, what is the custodian's reporting duty?
Report the original purchase price indefinitely, because hard-to-value assets are exempt from annual valuation.
Leave Box 5 blank and send the owner a statement saying the value is unknown.
Value the asset at FMV, include it in Box 5, and report it in Box 15a with code C in Box 15b.
Report the value only when the LLC interest is sold or distributed, using Form 1099-R.
A bank's IRA invests contributions in a variable-rate mutual fund program, so future values cannot be projected. What must the financial disclosure in the IRA disclosure statement include under Treas. Reg. § 1.408-6?
Each charge and its amount, how earnings are computed, and a statement that growth is neither guaranteed nor projected.
A projection of the account's value at ages 60, 65, and 70 based on the mutual fund's best historical annual rate of return.
Only the annual maintenance fee, because investment charges are already disclosed in the mutual fund's prospectus.
A guarantee of principal, because IRA disclosure rules require a minimum return on all bank IRAs.
A self-directed IRA owns a promissory note in default that is worth far less than its face amount. Why does the year-end value the custodian reports matter for the owner's taxes?
It sets the interest rate the borrower must pay the IRA in the following year.
It determines whether the IRA must file Form 990-T for the default year.
It controls the owner's deduction for the uncollected principal on Schedule A.
It is the December 31 balance used to compute the owner's next required minimum distribution.
Sections you finish are checked off in the contents.