Illiquid TIRA Investments and RMD calculations
We invested in Life Settlement policies. I’m curious what value should be used if the policies don’t pay off before RMD’s start. There are four possibilities as I see it:
1. $60k that we originally invested.
2. $48k that is the original investment less the money in escrow for premium payments that have already been payed out.
3. $100K when all policies payout.
4. Current value if sold in the secondary market, estimated $20k.
A secondary question: each year the custodian of this TIRA always asks us for an account value if different from the original investment of $60k. Thus far I’ve never changed it as it doesn’t look like it would matter until the year before RMD’s start. Do you agree with that thought?
As a side note we do have liquid assets in another TIRA that will cover many years of RMD’s without forcing a liquidation.
Thanks for the help.
Permalink Submitted by Alan - IRA critic on Wed, 2013-08-14 23:24
The custodian is responsible for reporting the 12/31 account fair market value to you and the IRS on Form 5498 or equivalent, and if the custodian does not have the ability to determine the value, an appraisal or analysis needs to be done and paid for by your IRA. Perhaps the insurance company can provide the value. This year end fair market value should be accurate each year for non RMD reasons, but it is more critical for the year prior to your reaching 70.5 for obvious reasons. Since your RMD can be aggregated over all your owned IRA accounts, it might be best to satisfy it from the liquid IRA, but you still need accurate values to determine your total RMD.
Permalink Submitted by Dave Haynie on Thu, 2013-08-15 02:12
Thanks, I’m curious what the non RMD reason would be.
Permalink Submitted by Alan - IRA critic on Thu, 2013-08-15 18:04
If your IRA has basis from non deductible contributions, any distribution requires a Form 8606 calculation based on the total value (current YE, not prior YE as for RMDs) of all non Roth IRA accounts in order to determine how much of the distribution is not taxable.
Permalink Submitted by Joe Luby on Mon, 2013-08-19 19:11
There are additional non-RMD reasons for ensuring proper FMV reporting that may apply as well:1) Proper calculation of reportable income from a Roth conversion.2) Proper calculation of reportable income from an in-kind or “like-kind” distribution of assets.3) Proper calculation of gross estate valuation for estate tax purposes.4) Proper calculation of beneficiary distributions under RMD rules (i.e. stretch IRA options).5) Proper creditor protection in the event of a creditor lawsuit against the IRA owner. Many states’ statutes provide for a specific sum which may be protected from a creditor lawsuit.6) Proper bankruptcy protection in the event of a bankruptcy filing by the IRA owner. Similar to number five above, IRAs are subject to specific protection limits under the bankruptcy rules.7) Proper determination of reportable income in the event of a prohibited transaction resulting in a deemed distribution of the IRA’s assets as of January 1st.This list is not intended to be all-inclusive but should highlight that proper valuation of IRA assets affects an IRA owner in many ways beyond just the RMD calculation.
Permalink Submitted by Dave Haynie on Mon, 2014-10-20 18:11
A follow up question. I missed the point about the “…and paid for by your IRA” and I paid for appraisal with non IRA money. Just hoping that I’m OK or do I need to withdraw the appraisal fee. It was done this year.