New Form 1099R & 5498 Reporting for IRA and Solo 401K Assets

Valuation of hard-to-value assets held inside self-directed IRAs and Solo 401k plans are being scrutinized more closely by the IRS. As a result, at the end of 2013 the Internal Revenue Service announced new reporting requirements directed at IRA and solo 401k investments not having a readily available fair market value. The new rules apply to IRS Form 5498, IRA Contribution Information, and Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans (e.g., Solo 401k Plans), IRAs, Insurance Contracts, etc.

The original plan was to make the changes mandatory for 2014, but the IRS has made it optional for 2014 but mandatory starting in 2015.

Commencing in 2014, the 1099-R Forms will contain a distribution code “K” to report the distribution of IRA and solo 401k assets not having a readily available fair market value (FMV). This new requirement will affect IRA and solo 401k owners and beneficiaries who take a distribution of hard-to-value assets in-kind or who process a Roth IRA conversion as well as Solo 401k in-plan Roth conversions. The type of assets include:

Membership interests in limited liability companies (LLCs), trusts, partnerships, corporations, etc., promissory notes and real estate.

The new code K will be used in conjunction with Code 1 (Early distribution, no known exception), Code 2 (Early distribution, exception applies), Code 4 (Death), Code 7 (Normal distribution), and Code G (Direct rollover and direct payment).

While Form 5498 does not apply to qualified plans including a solo 401k plan, it does apply to IRAs and thus the following changes apply starting in 2014. There are two new boxes on Form 5498.

Box 15a, “FMV of certain specified assets,” is used to report the fair market value of any hard-to-value assets in the self-directed IRA including IRA LLC. This requirement is in addition to reporting the total fair market value of the entire IRA account, which will still need to be reported to the IRS in box 5. Box 15b, “codes,” will be used to identify the kinds of assets held in the self-directed IRA account.

These codes include:

Stock (Code A)

Debt obligation (Code B)

LLC’s, including IRA LLCs (Code C)

Real estate (Code D)

Partnerships & Trusts (Code E)

Options (Code F)

Other assets (Code G)

More than two types of assets listed in A through G (Code H)

The instructions to Form 1099R and 5498 clearly state that “Trustees and custodians are responsible for ensuring that all IRA assets (including those not traded on established markets or with otherwise readily determined market value) are valued at their fair market value.”

Why is the IRS imposing these changes now?

By imposing these rules, the IRS wants to make sure it is not missing out on tax revenue especially if these hard-to-value assets appreciate in value. For instance, when distributions commence (whether required minimum distributions or premature) or when in-plan Roth conversions are processed, the IRS collects tax revenue.

Additional Information

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