IRA Valutions: Who Cares What It's Worth?

Not all IRAs are created equal (when it comes to providing an annual valuation, at least).

Consider the case of “Berks vs Commissioner of Internal Revenue.” In the case, Bernard and Claire Berks invested in notes with their IRAs but the borrowers either defaulted or their collateral did not adequately secure the debt. This resulted in the notes being worth zero. The IRA provider, over a period of several years, requested that the Berks provide an annual valuation. The Berks referred these queries to the investment provider who, allegedly, called the provider and told them that “the notes are worth zero.” No documentation supporting this assertion was provided. The Berks requested that the assets be valued at zero and that the provider terminate their accounts. In accordance with the provider’s policy, the assets were distributed from the IRA holder’s account to the IRA holder at the last recorded book value of the asset. In other words, the IRA holder received a 1099-R (form for reporting distributions from pension plans) for the full amount of the account using the original face value of the notes.

The Berks took the case to tax court challenging the valuation of the IRA at the time of distribution. The IRS did not see this situation the same way as the Berks did.  Not only would the IRS not accept the opinion of the Berks that the IRA was worth zero, they penalized them 20 percent of the account value for their “negligence” in failing to make a reasonable attempt to comply with tax laws, maintain adequate books and records or to substantiate items properly. They were also cited with the intentional “disregard” for rules and regulations. 

As is usual in tax cases, the burden of proof falls on the taxpayer. The Berks’ tax return claimed the IRA distributions were not taxable and therefore paid no taxes on the reported distribution. They blamed the preparer for this “oversight.” They blamed the IRA Provider for distributing the account at full value. In short, they took no responsibility for their account or their tax preparation and the court was not sympathetic.  In fact, the court found that these arguments actually proved the Berks’ negligence.

The case brings up a greater issue about the importance of valuations.

IRA holders whose accounts have alternative assets in them receive a request from their IRA providers every year to provide fair market value for their IRA’s assets. For most IRA holders, these annual valuations are of little importance because their IRAs are invested in publicly traded securities and their IRA providers will often prepare valuations for their clients at a fee. For reference, about 97 percent of IRAs are invested in publicly traded securities.

For the $126 billion invested in self-directed IRAs (SDIRA) however, valuations matter a great deal. The account holder, not the provider, is responsible for providing valuations every year on their assets.

This issue of determining fair market values for hard-to-value assets in SDIRAs has become a focal point for the IRS. The IRS is now paying attention to the fact that with many SDIRA assets, there is a wealth of taxes to either be reaped or avoided. 

So the Berks case offers several learning points. First, provide an annual valuation, with documentation, when the IRA provider requests it.  If the asset is worth zero, provide proof that the asset is worth zero. For those with publically traded IRA investments, much of the work is done for them by the IRA investment provider, usually at a fee (we don’t charge a valuation fee at New Direction IRA.)  SDIRAs give IRA holders entrance to every investment allowed by law, but the account holder must find and manage the investment and provide the value annually.  Those are the rules. With SDIRAs, investors receive unlimited possibilities but they are also expected to know and understand the rules.   

How Do I Find Self-Directed IRA Investments?

Self-directed IRAs, or SDIRAs, are becoming increasingly popular because they allow account holders to choose from a world of investments. At New Direction IRA we’ve seen IRAs invest in everything from trailer parks to oil fields to Middle Eastern currency and more.

The sheer number of investments could seem daunting, but many investors view this as an opportunity to invest in what they know and trust. Here, we’ll go through the main alternative asset types and share how you might begin looking for investments.

Note that all due diligence is your responsibility and not the responsibility of the IRA provider, like New Direction IRA. (At NDIRA, we do not offer financial advice; we only service the investment that you choose.)

Real Estate

Real Estate investments come in all shapes and sizes. You can invest your IRA in commercial or residential real estate, fix and flips, rental properties, raw land and everything in between.

There are many options for real estate IRA investing

You may find it beneficial to search for investment property by contacting a realtor, driving around the area you in which you want to invest or attending real estate investment groups. What’s important to remember is that you can invest in nearly any real estate as long as it follows disqualified persons rules.

Disqualified persons to an IRA include the IRA holder, his spouse, his parents and grandparents, his children and grandchildren, their spouses, certain fiduciaries and any entity owned or operated by a disqualified person. So, for instance, you couldn’t buy a rental property or vacation property and let your kids live in it.

You can, however, partner with both disqualified and non-disqualified persons. You’ll have to be diligent about paperwork and incoming/outgoing funds but the flexibility afforded by the IRS to maximize your funds opens your investment options even further. You can even take out a non-recourse loan to mortgage investment property. For more information on funding, visit http://www.newdirectionira.com/real_estate_ira.html

Precious Metals

Your IRA can invest in gold, silver, platinum and palladium products. There are certain fineness requirements for each and you cannot invest in many collectible coins, but there are simply many options for a precious metals investment. For a full list of acceptable coins and metals, visit http://www.newdirectionira.com/gold_iras.html.

In an SDIRA, you find the dealer from which you want to buy metals and determine the terms of the deal with him. You send the terms over to your IRA provider and they will send money where needed. At New Direction IRA, you can then choose your depository (where your metals will be stored) and the dealer will ship the metals directly to the depository.

Performing due diligence is necessary for all investments, especially precious metals. Make sure you are comfortable with the dealer and depository and the terms of the sale.

Private Equity

Finding private equity investments often requires more leg work than real estate or precious metals investments.

Where you can often find listings of property or scores of dealers offering metals, private equity offerings require greater diligence. There are several website cropping off that seek to match investors to companies and individuals seeking investments.

You can also invest your IRA in entities that may be launching a new product or certain groups that are preparing to make large investments. As above, disqualified persons apply and full details can be found at http://www.newdirectionira.com/private-equity.html.

The best way to find private equity investments is to get involved. Visit investment groups, research companies, search for startups and find an investment opportunity that fits your IRA investment goals.

What motivates American to save for retirement?

Nearly half of American workers are not confident they will have enough savings to retire according to the Employee Benefits Research Institute’s 2013 Retirement Confidence Survey. Only 13% of those surveyed said they were “very confident” in a comfortable retirement, while 22% of people believe they’ll have to retire later than they planned due to the poor economy, inadequate finances and lack of confidence in social security—only 31% of workers think Social Security benefits will be higher than they are today.

That said, we don’t need a survey to tell us that retirement savings and social security are major issues for the massive generation set to retire within the next 20 years. Many employers no longer match 401(k) funds, further devaluing a 401(k) and demotivating the 401(k) holder. Many workers and financial professionals are clearly not confident that the federal government is prepared to support retirees in the future.

Preparing for retirement not only benefits you, but benefits the entire industry. If millions of Americans are not financially ready for retirement, those who do prepare to retire will be adversely affected by higher taxes or stress on the public safety net or some as-yet-unknown factor.

So how do motivate the millions of eventual retirees who haven’t started to think about their retirement? Is it fear? Is the best way to motivate workers to put a portion of their salary aside this year to paint before them a grisly picture of their golden years?

Let’s look at how fear effects action. If the fear is immediately apparent (say, a drooling bear moving rapidly toward you), it can be a great motivator. But how many of us think about retirement savings while working full-time or overtime, raising a family, practicing hobbies, enjoying friends – basically, while living a full life? Do we look at an unknown retirement as we look at a hungry bear? If the fear of a destitute retirement doesn’t inspire you to save and plan, then it’s not a good motivator.

Many people fear the unknown. EBRI reports that 44% of workers don’t know how much they’ll need for retirement. The numbers indicate, however, that ignorance may not be bliss. If half of all workers still don’t have confidence in the amount they’re saving, then they either must not fear the unknown or be adequately motivated by that fear.

Indeed, we may be motivated by a different kind of fear.

What is real to most of us is the fear of losing our money. What is real is watching the numbers fall every quarter, knowing that money you earned and saved is now gone, due to some individual or some company’s bad decisions or bad luck. Investors don’t always know all they’re options or they think alternative investments are too risky or too complicated to try. In short, they’re paralyzed.

If you’re reading this, you likely already hold a self-directed IRA or you are considering one. Maybe you were able to shake off the retirement paralysis, look at your statement, and do something to change the status quo. Now encourage others to do the same. The more workers who take control of their retirement funds, the better we will all be in the long run.