Valuation for 1099R Purposes

Question: “I converted a traditional IRA to a Roth IRA in which I have several non-traditional / alternative investments (REITs, private placement, etc) which have liquidity and marketing restrictions thereby limiting their current valuation. How / where do the FMVs I am getting from a outside valuation specialist get entered on Federal taxes? I received a 1099-R from the custodian for the distribution from the Traditional IRA to the Roth IRA and it lists the full initial purchase value of these alternative assets under gross distribution and checks the box “taxable amount not determined” but then lists the same gross distribution amount as the taxable amount. Would the appraised FMV instead get entered as the taxable amount and attach the valuation statement to the tax form? Thanks for any insights you can offer.”

Answer: All distributions should be reported at the fair market value at the time of distribution.  This includes conversions of assets in a traditional IRA to a Roth IRA.  Therefore, normally your outside valuation would have been used to adjust the value of your assets prior to the conversion, which should have resulted in a number on your 1099R that matched the value of your assets as of the date of the conversion.  This is the same concept as adjusting the value of a stock or mutual fund to reflect the current value prior to conversion.  If the number on your 1099R is the full historical value instead, you may want to check with your custodian to see why they did not adjust the value of your assets prior to the conversion.  It is possible that your custodian will need to file a corrected 1099R showing the reduced value according to your third party appraisal.  You should realize that valuations of non-traditional assets in self-directed IRAs are often difficult to assess, and so different custodians may have widely varied policies regarding what they accept to adjust valuations prior to distribution or conversion. 

Good luck, and let me know if I can answer any more questions.

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