How To Series: Checkbook IRA Valuation
IRS rules require annual reporting for IRA accounts that include the fair market valuation of the IRA’s holdings.
In a conventional IRA invested in stocks, bonds, and mutual funds, the IRA account custodian can simply look up the publicly available value of plan assets and obtain the necessary fair market value of the account.
In a self-directed Checkbook IRA that is invested in alternative assets the values are not readily available to the IRA custodian. It therefore becomes the responsibility of the IRA account holder to provide the custodian with a statement of fair market value for their IRA holdings.
Why is Valuation Required?
The IRS requires some basic reporting on an annual basis for all IRA accounts on form 5498. The form is a simple summary of the account that lists beginning of year value, end of year value, and any contributions, distributions, or plan-to-plan rollovers that have taken place during the current tax year.
This information is used for several purposes such as to validate the history of an IRA over time and corroborate what is reported on an individual’s personal return relative to their IRA contributions and distributions. Aggregate data is also used to inform the government about citizen’s retirement savings trends and guide policy decisions.
There are also several circumstances where IRA account value drives taxable events, such as when an account is subject to Required Minimum Distributions, when an investor is performing a Roth IRA conversion, or if a specific asset is being distributed from the IRA to the account holder in-kind.
When is Valuation Required?
Most self-directed IRA custodians require an annual valuation as of December 31st and expect reporting from clients by mid-January. This allows them to include the end of year value on your December account statement, which is often referred to as a “substitute 5498” as it includes all of the reported information. This timing also gives the custodian plenty of time to prepare and submit form 5498 to the IRS by the required due date.
There are some circumstances when an ad-hoc valuation must be provided to accompany a taxable event for the IRA. This would include the distribution of an asset from the IRA in-kind, or a Roth IRA conversion.
What Happens if I Don’t Report?
Some custodians will impose a penalty for late reporting of annual valuation.
If you fail to update the valuation for multiple years an institution may resign as custodian of your account. They must demonstrate to their regulators that they are actively managing accounts and operating in a compliant fashion, and too many delinquent accounts can be problematic in this regard.
Don’t become a “zombie” account with your IRA custodian. It can have bad results.
Informal and Formal Valuations
The annual valuation reporting for most IRA accounts is informal in nature. The value is just a benchmark number for the account but has no tax implications. A reasonable estimate of value is therefore acceptable.
When the IRA account valuation is associated with a taxable event, then a more formal valuation is required. Formal valuations are required annually at year-end for accounts subject to Required Minimum Distributions. This includes any tax-deferred IRA where the account holder is over age 72, or a non-spousal inherited IRA where the original account holder passed on or before December 31st, 2019.
Formal valuations are also required when an asset is being distributed in-kind to the IRA account holder, or when a Roth IRA conversion is being performed.
An informal valuation can simply be reported by the IRA account holder who has used reasonable means to determine fair market value.
A formal valuation may require certification from a licensed professional such as a real estate appraiser, CPA, or attorney.
Reporting Policies Vary by Custodian
The tax code does not actually provide specific guidance relative to IRA valuation, other than the requirement to report.
As a result, the policies of each IRA custodian are derived from how their compliance officers interpret the law and guidance from their state regulators. Policies differ to some degree, so be sure you understand how your IRA custodian operates and what your reporting requirements are.
A guiding principal is Treasury Regulation § 20.2031-1(b), which states:
“The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”
How to Value Assets
Following are general guidelines for determining the value of commonly held investments in a self-directed IRA.
Real Estate
Informal: A real estate comparables report from a licensed realtor is the best option and widely accepted. Some custodians will accept tax-assessed value for undeveloped land or online valuations such as produced by Zillow or Redfin.
Formal: A current appraisal from a licensed professional. The definition of current varies, but less than 60 days should reliably be acceptable.
Performing Promissory Note
Informal & Formal: The open principal balance of the note plus any accrued and unpaid interest due.
Non-Performing Note
Informal: A 3rd party value opinion from someone knowledgeable in the asset class such as a note broker or servicer.
Formal: A 3rd party value opinion from a licensed professional such as an appraiser, CPA, or attorney.
Digital Currency
Informal & Formal: The spot price of a token as listed on a major exchange or index.
Private Placements, Syndications, & Funds – Asset Holdings
When investing in a private company or fund that is purely an asset holding vehicle, the value of the underlying assets is generally used. A balance sheet from the investment provider may suffice.
Many types of investments in this class are simply valued at the initial purchase price unless the investment provider specifically indicates a change in value.
In the case of a formal valuation, a certified valuation from a licensed 3rd party may be required.
Private Placements & Funds – Operating Business
Valuation for an operating business is complex and is typically derived from earnings. A 3rd party opinion provided in the framework of IRS Revenue Ruling 59-60 should be utilized.
Cash and Other Easily Valued Assets
If an IRA holds cash, stocks, or other publicly traded assets, an account statement evidencing the holdings and value will be sufficient for valuation calculations.
How to Report
Check with your custodian to be sure you understand their reporting process and requirements.
Some custodians can facilitate online reporting for informal valuations but may require a paper form with the signature of a licensed professional to certify a formal valuation.
With a Checkbook IRA holding a single LLC or trust entity the sum value of the entity is sufficient some custodians. Other custodians may want a listing of the individual assets held within the LLC or trust.
Plan Accordingly
It is important to understand reporting requirements and plan ahead so you can meet the appropriate reporting deadlines.
Formal appraisals or licensed certifications can take additional time, so be sure to build that lead time into your process.
If you are wanting to perform a Roth conversion prior to year-end, you will want to start well before December 1st.
Keep your eyes out for reminders from your IRA custodian around the 1st of December, but do not rely on that as those reminder emails could be going to your junk mail folder. A best practice is to put an event on your personal calendar reminding you to prepare your valuation, with enough lead time to obtain the necessary documentation suitable to your situation.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
