HENDERSON, Nev., Aug. 28, 2012 /PRNewswire/ -- Investors are falling into costly IRA pitfalls resulting in millions paid in excess tax, IRS penalties and interest. These costs are the result of common valuation mistakes related to alternative investments held in IRAs.
IRAs are often invested in illiquid alternative assets which don't trade on established exchanges. Alternative investment shares are commonly required to be held for indefinite amounts of time before realizing a liquidity event. For example, Non-traded REITs usually have time horizons of five years or more before listing on a public exchange or redeeming shares for cash. These and other factors can result in two different share values at the same time: net asset value (NAV) and fair market value (FMV).
NAV is basically the total value of the underlying portfolio divided by the number of shares held by investors. FMV is the price at which the alternative asset shares would change hands between willing buyers and sellers in arms-length transactions. It's the amount an investor could get for their illiquid REIT, hedge fund, or other alternative asset shares if they had to find a buyer and sell them today.
"The definitions are completely different and usually create two very different results," says Joe Luby, CFP®, author of KEEP IT! Advanced Tax Strategies for IRAs. "Consider publicly traded closed-end mutual funds. Day-to-day trading price or FMV is rarely the same as the NAV of the fund. Funds trading higher than NAV are at a premium while funds trading lower are at a discount. Either way, the shares have two distinct valuations depending on which definition is applied."
IRA transactions are usually reported at NAV because it's the easiest to determine. Most asset sponsors and managers provide this value annually. Investors need to know that FMV is the proper and required valuation for tax reporting purposes. IRA assets reported at NAV instead of FMV for taxable events result in over or under payment of tax. Overpayments can result in refunds of excess tax paid. Underpayments may be subject to penalties and interest plus additional tax owed!
Required minimum distribution (RMD) calculations, Roth conversions, in-kind distributions, estate tax calculations, and other events, depend on proper FMV of alternative investments to determine the applicable tax. IRA owners with alternative investments incurring these types of events should visit www.FixIRAValuationMistakes.com.
Luby's firm,Jagen™ LLC, helps IRA owners by fixing past transactions and avoiding future issues. "We find that many people don't understand the rules and are unaware they may have paid more tax than necessary. This led us to create the website to highlight these issues and connect with IRA owners and professional advisors who may need our help."
Fix IRA Valuation Mistakes
Operations Manager, Jagen™ LLC
1055 Whitney Ranch Drive Suite 110
Henderson, NV 89014
E. [email protected]
This press release was issued through eReleases® Press Release Distribution. For more information, visit http://www.ereleases.com.
SOURCE Jagen LLC