Retirement Security: Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets

GAO Paper No. 17-102

56 Pages Posted: 18 Jan 2017

See all articles by Charles Jeszeck

Charles Jeszeck

Government Accountability Office (GAO)

Christopher Falcone

Government Accountability Office (GAO)

David Lehrer

Government Accountability Office (GAO); National Academy of Social Insurance (NASI)

Emily Gruenwald

Government Accountability Office (GAO)

Jay McTigue

Government Accountability Office (GAO)

Jessica Moscovitch

Government Accountability Office (GAO)

Jonathan McMurray

Government Accountability Office (GAO)

MaryLynn Sergent

Government Accountability Office (GAO)

Tom Moscovitch

Government Accountability Office (GAO)

Date Written: December 8, 2016

Abstract

Federal data collection efforts to date have captured little information on retirement accounts holding unconventional assets — such as real estate, precious metals, private equity, and virtual currency — making the prevalence of such accounts unknown. In tax year 2015, the Internal Revenue Service (IRS) began requiring that custodians or trustees of individual retirement accounts (IRA) — including banks or other institutions approved to hold account assets — report selected information on unconventional assets in their clients' accounts to IRS. As of November 2016, IRS plans to begin compiling the new IRA asset data in 2017, but has not specified when the new IRA asset data will be available for analysis. Seventeen of the 26 custodians, who GAO identified as allowing retirement accounts with unconventional assets and who participated in GAO's data collection effort, reported having nearly half a million of these accounts in their custody at the end of calendar year 2015. IRAs made up the vast majority of accounts and assets reported.

An IRA owner's decision to invest in unconventional assets can expand their role and responsibilities substantially. GAO's review of industry documents found that individuals wanting to invest in unconventional assets through their IRA generally agree to be responsible for overseeing the selection, management, and monitoring of account investments and shoulder the consequences of most decisions affecting their accounts. For example, owners of such accounts assume a fiduciary role, which makes them assume greater responsibility for overseeing the selection, management, and monitoring of account investments, and shoulder the consequences of most decisions affecting their accounts.

Current IRS guidance provides little information to help IRA owners understand their expanded responsibilities and potential challenges associated with investing in unconventional assets. Targeted IRS guidance for these IRA owners may help them navigate the potential compliance challenges associated with certain types of unconventional assets. For example, GAO found that some IRA owners can experience challenges in the following areas:

• Monitoring for ongoing federal tax liability: IRA owners are not always aware of the need to monitor the gross income from certain unconventional assets in their accounts for ongoing federal tax liability. For example, IRA owners who invest in active businesses or debt-financed properties need to monitor their accounts for ongoing tax liability that must be paid from the IRA. Failure to do so can result in underpayment penalties.

• Obtaining annual fair market valuations for nonpublicly traded assets: IRA owners investing in hard-to-value unconventional assets can face challenges meeting their responsibilities to provide updated fair market value information to their custodian to meet IRS's annual reporting requirement. Failure to provide an updated fair market value in a timely manner can result in a custodian prematurely distributing account assets to the owner at a fair market value that is.

Keywords: Retirement, IRA, SDIRA, Self-Directed

Suggested Citation

Jeszeck, Charles and Falcone, Christopher and Lehrer, David and Gruenwald, Emily and McTigue, James and Moscovitch, Jessica and McMurray, Jonathan and Sergent, MaryLynn and Moscovitch, Tom, Retirement Security: Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets (December 8, 2016). GAO Paper No. 17-102, Available at SSRN: https://ssrn.com/abstract=2900913 or http://dx.doi.org/10.2139/ssrn.2900913

Charles Jeszeck

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Christopher Falcone

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

David Lehrer (Contact Author)

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

National Academy of Social Insurance (NASI) ( email )

1776 Massachusetts Avenue, NW
Suite 615
Washington, DC 20036-1904
United States

Emily Gruenwald

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

James McTigue

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Jessica Moscovitch

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Jonathan McMurray

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

MaryLynn Sergent

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Tom Moscovitch

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

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