RETIREMENT 

SECURITY

Improved Guidance 

Could Help Account 

Owners Understand 

the Risks of Investing 

in Unconventional 

Assets

Report to the Ranking Member, 

Committee on Finance, U.S. Senate

December 2016

GAO-17-102

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-17-102, a report to the 

Ranking Member, Committee on Finance, 

U.S. Senate

December 2016

RETIREMENT SECURITY

Improved Guidance Could Help Account 

Owners Understand the Risks of Investing in 

Unconventional Assets

What GAO Found

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 not current, potentially incorrect, and which could lead to 

a loss of tax-favored status for their retirement savings. View GAO-17-102. For more information, 

contact Charles Jeszeck at (202) 512-7215 or

jeszeckc@gao.gov , or James R. McTigue, Jr. 

at (202) 512-9110 or mctiguej@gao.gov.

Why GAO Did This Study

Federal law places few restrictions on 

the types of investments allowable in 

tax-favored retirement accounts, such 

as IRAs or employer-sponsored 401(k) 

plans. Recent federal and state 

investigations and litigation have raised 

questions as to whether investing in 

unconventional assets may jeopardize 

the accounts’ tax-favored status, 

placing account owners’ retirement 

security at risk. GAO was asked to 

examine issues related to the potential 

risks and responsibilities associated 

with investments in unconventional 

assets.

GAO examined: (1) what is known 

about the prevalence of accounts that 

invest in unconventional assets; (2) 

how these accounts are managed; and 

(3) what challenges are associated 

with administering these retirement 

accounts. GAO reviewed relevant 

federal laws, regulations, and 

guidance; analyzed data collected from 

the retirement industry; analyzed 

available industry documents; and 

reviewed 334 related consumer 

complaints collected from three federal 

agencies and two independent entities.

What GAO Recommends

GAO is making three 

recommendations to the Commissioner 

of Internal Revenue to, among other

things, improve guidance for account 

owners with unconventional assets on 

monitoring for ongoing federal tax 

liability and to clarify how to determine 

the fair market value of hard-to-value 

unconventional assets. IRS generally 

agreed with these recommendations.
Page i GAO-17-102 Unconventional Assets

Letter 1

Background 4

Full Extent of Retirement Account Investment in Unconventional 

Assets Is Unknown, but Custodians Reported Nearly Half a 

Million Accounts Invested in Unconventional Assets in 2015 13

Retirement Account Owners Investing in Unconventional Assets 

Are Responsible for Account Management and Compliance 16

IRA Owners with Unconventional Assets Can Face Challenges 

with Tax Liability, Valuation, and Distribution, and IRS Provides 

Limited Guidance to Assist Them 25

Conclusions 37

Recommendations for Executive Action 38

Agency Comments and Our Evaluation 39

Appendix I Objectives, Scope, and Methodology 41

Appendix II Excerpts of Language Included in IRS Model Form 5305-A 45

Appendix III Comments from the Internal Revenue Service 46

Appendix IV GAO Contacts and Staff Acknowledgments 50

Tables

Table 1: Examples of Unconventional Assets in Tax-Favored 

Retirement Accounts 6

Table 2: Federal, State, and Independent Entities Providing 

Oversight for Retirement Accounts Invested in 

Unconventional Assets 12

Table 3: Current Extent of Federal Data Collection on Retirement 

Accounts with Unconventional Assets 14

Table 4: Custodian-Reported Aggregate Number and Value of 

Retirement Accounts Investing in Unconventional Assets 

by Account Type, as of December 31, 2015 15

Table 5: Examples of Account Owner and Custodian 

Responsibilities Associated with the Purchase of 

Contents
Page ii GAO-17-102 Unconventional Assets

Unconventional Assets in an Individual Retirement 

Account (IRA) 18

Table 6: Examples of Documentation that Selected Custodians 

Require Before Certain Assets Can Be Purchased for an 

Individual Retirement Account (IRA) 19

Table 7: Account Owner and Custodian Responsibilities 

Associated with the Ongoing Individual Retirement 

Account Management and Maintenance, Based on 

Review of Selected Custodial Agreements 21

Table 8: Examples of How Selected Custodians’ Fee Structures 

for Annual Account Maintenance Could Affect the Overall 

Cost of Holding an Unconventional Asset Valued at 

$100,000 22

Table 9: Examples of Retirement Account Owners Facing Federal 

Tax Consequences Based on an Asset’s Last-Known Fair 

Market Value (FMV) 30

Table 10: Examples of Potentially Fraudulent Assets in Retirement 

Accounts 32

Table 11: Examples of Retirement Account Owner Challenges 

Associated with Liquidating Unconventional Assets 33

Table 12: Examples of Retirement Account Owners 

Misunderstanding Their Responsibilities to Monitor 

Investments 34

Figures

Figure 1: Examples of How an Individual Retirement Account 

(IRA) Owner Investing in Rental Real Estate May 

Unknowingly Engage in a Prohibited Transaction 26

Figure 2: Examples of How Certain Individual Retirement Account 

(IRA) Investments Can Trigger Unforeseen Federal Tax 

Liability 27

Figure 3: Examples of Challenges from Individual Retirement 

Account (IRA) Owners Not Providing Updated Fair 

Market Value (FMV) Information to Their Custodians 29

Figure 4: Excerpts of Language Included in IRS Model Form 

5305-A 45
Page iii GAO-17-102 Unconventional Assets

Abbreviations

DOL Department of Labor

EBSA Employee Benefits Security Administration

ERISA Employee Retirement Income Security Act of 1974

FDIC Federal Deposit Insurance Corporation

FINRA Financial Industry Regulatory Authority

FMV fair market value

IRA individual retirement account

IRC Internal Revenue Code

IRS Internal Revenue Service

LLC Limited Liability Company

NASAA North American Security Administrators Association

NCUA National Credit Union Administration

OCC Office of the Comptroller of the Currency

RMD required minimum distribution

SEC Securities and Exchange Commission

UBTI Unrelated Business Taxable Income

UDFI Unrelated Debt-Financed Income

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Page 1 GAO-17-102 Unconventional Assets

441 G St. N.W.

Washington, DC 20548

December 8, 2016

The Honorable Ron Wyden

Ranking Member

Committee on Finance

United States Senate

Dear Senator Wyden:

Each year individuals saving for retirement in tax-favored retirement 

accounts defer an estimated $100 billion in federal tax revenue.1 Federal 

law places few restrictions on the types of investments allowable in these 

tax-favored retirement accounts. Aside from a general prohibition on 

investing retirement funds in life insurance or collectibles, individuals can 

generally invest in a broad spectrum of assets.2 Many owners of 

individual retirement accounts (IRA) and participants in 401(k) plans 

invest in mutual funds comprising stocks, bonds, and cash (in part 

because their IRA custodian or employer may limit their investment 

options).3 Other individuals choose to invest a portion of their savings in 

less conventional nonpublicly traded assets not commonly held in 

retirement accounts, such as real estate, precious metals, and private 

equity. To facilitate such “unconventional” investments, these account 

owners often roll over, or transfer, their accumulated retirement savings 

into a similar retirement account for which a custodian or employer allows 

 1

U.S. Department of the Treasury, Office of Tax Analysis, Tax Expenditures (FY2018), 

(Washington, D.C.: Sept. 28, 2016), https://www.treasury.gov/resource-center/taxpolicy/Pages/Tax-Expenditures.aspx. This estimate, which is based on provisions of 

federal tax law enacted through July 1, 2016, is measured as the tax revenue that the 

government does not currently collect on contributions and earnings amounts, offset by 

the taxes paid by those who are currently receiving retirement benefits. Revenue loss 

estimates do not represent the amount of revenue that would be gained from repealing a 

tax expenditure because repeal would probably change taxpayer behavior in some way 

that would affect revenue.

2

26 U.S.C. § 408(a)(3), (m). “Collectibles” can include works of art, rugs, antiques, metals, 

gems, stamps, coins, alcoholic beverages, or certain other tangible personal property 

specified by the Secretary of the Treasury. Some exceptions exist for certain coins and 

bullion.

3

In this report, we use the general term “account owner” to refer to (1) IRA owners and (2) 

sponsors of 401(k) plans who are either self-employed or owners of small businesses with 

no employees

Letter
Page 2 GAO-17-102 Unconventional Assets

investment in such assets.4 Regardless of the types of investments held, 

IRAs and 401(k) plans must adhere to specific rules governing taxfavored accounts, including limits on contributions and distributions, and 

comply with various federal disclosure and reporting requirements.

Recent federal and state investigations and litigation have raised 

questions as to whether the investment in unconventional assets in 

retirement accounts may jeopardize these accounts’ tax-favored status 

and place account owners’ retirement savings at risk. You asked us to 

examine the potential compliance risks and responsibilities account 

owners may assume when choosing to invest in unconventional assets. 

This report examines:

1. what is known about the prevalence of retirement accounts that invest 

in unconventional assets,

2. how these accounts are managed, and

3. what challenges, if any, are associated with the administration of 

these types of retirement accounts.

We employed several diverse methodologies in developing our findings. 

For all objectives, we interviewed a range of federal and state regulators, 

industry stakeholders, and participant advocates; reviewed relevant 

federal laws, regulations, and guidance; and consulted available 

literature. To examine the prevalence of retirement accounts that invest in 

unconventional assets, we compiled data from industry stakeholders, web 

searches, and the literature to help us identify 26 custodians and 48 other 

service providers with experience working with account owners in 

establishing and managing such accounts.5 Next, to learn about the 

number, type, and value of retirement accounts held under custody at the 

end of calendar year 2015, we conducted a survey data collection effort 

and obtained responses from 17 of the 26 custodians that we identified 

 4

A custodian is either a bank or other institution that demonstrates that the manner in 

which assets will be held are consistent with the Internal Revenue Code. 26 U.S.C. § 401; 

26 C.F.R. § 1.401(f)-1(b)(1)(ii). An IRA custodian generally serves as an asset holder for 

an IRA. It tracks all IRA activities, such as contributions, 401(k) rollovers, transfers, 

distributions and any investments made through an IRA. The custodian also reports 

transactions to the Internal Revenue Service. An IRA custodian can either be an IRSapproved financial institution or a nonfinancial institution that has been given specific IRS 

approval.

5

The types of service providers that we identified included account recordkeepers, 

facilitators of special transactions, attorneys, and accountants. 
Page 3 GAO-17-102 Unconventional Assets

from available sources. We focused our effort on custodians as they are 

responsible for reporting annually the fair market value of each IRA under 

custody to the Internal Revenue Service (IRS). The custodians who 

provided information varied in terms of the number and value of accounts 

they held, and the types of unconventional assets they allowed. To 

examine how these retirement accounts are managed and any 

associated challenges, we developed a follow-up set of questions for the 

same 17 custodians and received responses from 10 of them. We also 

developed a similar set of questions for the 48 service providers we 

identified who provide administrative support for IRAs and solo 401(k) 

plans, collecting information from 21 of them. To augment our 

understanding of challenges associated with managing retirement 

accounts invested in unconventional assets, we analyzed 334 complaints 

filed with three federal agencies—the Department of Labor (DOL), the 

Department of the Treasury’s Office of the Comptroller of the Currency 

(OCC), and the Securities and Exchange Commission (SEC)—and two 

independent organizations—the Financial Industry Regulatory Authority 

(FINRA) and the Better Business Bureau.6 Our list of custodians and 

service providers was used to query databases and identify complaints. 

We analyzed the complaints, developed general categories of challenges 

account owners faced, and conducted a two-step review process to 

ensure proper categorization of each complaint. We did not confirm the 

authenticity of these complaints or independently investigate any of the 

allegations made, or collect information on the extent to which each 

complaint was resolved. As part of developing challenge categories, we 

also reviewed federal and state enforcement actions against entities 

involved with these types of retirement accounts. Finally, we examined 

industry websites, and collected and reviewed publicly available 

documents, including application forms, fee disclosures, and custodial 

trust account agreements used to establish an IRA. We determined that 

the data obtained from these sources was sufficiently reliable for the 

purposes of this report. For more information on the development of the 

methodology used in this report, see appendix I.

We conducted this performance audit from August 2015 through 

December 2016 in accordance with generally accepted government 

auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable 

 6

IRS officials told us that the IRS systems would not allow them to locate complaints on a 

specific topic. 
Page 4 GAO-17-102 Unconventional Assets

basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives.

In passing the Employee Retirement Income Security Act of 1974 

(ERISA), Congress sought to encourage individuals to save for retirement 

in tax-favored retirement arrangements.7 Traditionally, account owners 

participating in these arrangements defer taxes on contributions to these 

accounts up to certain statutory limits, and in general, contributions and 

investment earnings on those contributions are not taxed as income until 

the account owner withdraws them from the account.8 In addition, 

account owners typically direct their investments and make decisions 

regarding the purchase, sale, reinvestment, and withdrawal of 

investments. Individuals saving for retirement in the United States 

typically save through IRAs or an employer-sponsored plan, like a 401(k) 

plan.9

• IRAs have become a key retirement savings vehicle for many 

individuals, including small business owners, independent contractors, 

and other workers who are not covered by an employer-sponsored 

retirement plan. ERISA established IRAs to (1) provide a way for 

individuals not covered by a pension plan to save for retirement and 

(2) give retiring workers or individuals changing jobs a way to 

preserve assets in employer-sponsored retirement plans by allowing 

them to roll over, or transfer, plan balances into IRAs. IRA owners 

generally make tax-favored contributions to their accounts to 

purchase assets from investment options offered through their 

 7

Pub. L. No. 93-406, 88 Stat. 829 (codified as amended at 29 U.S.C. §§ 1001-1461). 

Under ERISA, employers may sponsor two broad types of retirement plans, referred to in 

ERISA as pension plans: (1) defined benefit plans, which generally promise to provide 

benefits based on an employee’s years of service and frequently are based on salary, 

regardless of the performance of the plans’ investments, and (2) defined contribution 

plans, including 401(k) plans, in which benefits are based on contributions and the 

performance of the investments in participants’ individual accounts.

8

The annual contribution limit for traditional and Roth IRAs in 2017 is $5,500 ($6,500 if 

age 50 or older). The annual elective deferral limit for 401(k) plans in 2017 is $18,000 

($24,000 if age 50 or older). The total annual additions to a 401(k) plan participant’s 

account for 2017 is $54,000 ($60,000 if age 50 or older).

9

This report focuses on IRAs and solo 401(k) plans, as they are the retirement vehicles 

account owners use most often to invest in unconventional assets.

Background
Page 5 GAO-17-102 Unconventional Assets

custodians. IRS has the primary enforcement responsibility to ensure 

that IRAs meet Internal Revenue Code (IRC) requirements necessary

to qualify for preferential tax treatment. The most common IRA types are: 

(1) traditional IRAs (which allow eligible individuals to make tax-deductible 

contributions and accumulate tax-deferred investment earnings); and (2) 

Roth IRAs, (which allow eligible individuals to make after-tax contributions 

and accumulate investment earnings tax-free).10

• 401(k) plans have become the most common employer-sponsored 

retirement savings vehicle in the United States. Created by the 

Revenue Act of 1978, 401(k) plans typically allow participants to 

specify the size of their contributions and direct those contributions, as 

well as any made by their employer, to one or more investments 

among the options that the employer has preselected as offering 

effective diversification across broad asset classes. Investment 

options generally include mutual funds, company stock, and money 

market funds. DOL’s Employee Benefits Security Administration 

(EBSA) is responsible for, among other things, administering and 

enforcing the fiduciary, reporting, and disclosure provisions of Title I of 

ERISA. Self-employed individuals or owners of small businesses with 

no employees may sponsor a 401(k) plan, known as a solo 401(k) 

plan. To set up a solo 401(k) plan, individuals must adopt a written 

plan document, arrange a trust for the plan’s assets, develop a 

recordkeeping system, and provide plan information to employees 

eligible to participate. Solo 401(k) plan account owners can select the 

plan’s investment options as plan sponsor and invest in these options 

as the plan participant. (See sidebar for further description of solo 

401(k) plans, the 401(k) plans we focus on in this report.)

The owner of a tax-deferred account cannot keep retirement funds in their 

accounts indefinitely. When IRA owners or 401(k) plan participants reach 

age 701⁄2, they generally have to start taking annual payments—known as 

required minimum distributions (RMD)—from their plan savings based on 

their account balance and life expectancy.11 The distribution for the year 

in which a participant turns 701⁄2 must be made no later than April 1 of the 

 10Less common are employer-sponsored plans that use IRAs, such as Saving Incentive 

Match Plans for Employees or a Simplified Employee Pension, which may also allow 

account owners to invest in unconventional assets.

11Failure to take the RMD subjects the account owner to an excise tax equal to 50 percent 

of the amount by which the RMD exceeds the actual amount distributed during the taxable 

year. 26 U.S.C. § 4974. Roth IRAs, which are funded by after-tax contributions, do not 

require withdrawals until after the death of the owner.

What Is a Solo 401(K) Plan?

While employer-sponsored plans generally 

have multiple employees participating in their 

plans, a solo 401(k) plan—also called an 

individual 401(k), a one-participant plan, selfemployed 401(k), or self-directed 401(k) 

plan—are qualified retirement plans designed 

for the self-employed or a small business 

owner with no employees (beyond themselves 

and their spouse). The Economic Growth and 

Tax Relief Reconciliation Act of 2001 included 

reforms that generally provided small 

business owners with no employees and the 

self-employed the same advantages of a 

conventional 401(k) plan, such as employee 

deferrals, loan features, and Roth 

contributions. Solo 401(k) sponsors select 

plan investment options and may contribute to 

the plan both as plan sponsor and plan 

participant up to a combined $54,000 per 

account (or $60,000 if age 50 or older) in tax 

year 2017. In addition, plan sponsors may 

elect to maintain exclusive authority and 

discretion to manage and control plan assets 

without involving a third-party. 

Source: GAO analysis of IRS and industry information. | 

GAO-17-102
Page 6 GAO-17-102 Unconventional Assets

following calendar year and no later than December 31 for any other 

subsequent year.12

Account owners have wide latitude in the types of assets in which they 

can invest and custodians can choose to limit which type of assets they 

will allow. While some custodians generally limit investments to publicly 

traded assets, other custodians allow investments in a range of 

unconventional assets.13 (See table 1.)

Table 1: Examples of Unconventional Assets in Tax-Favored Retirement Accounts

Asset type Asset description

Energy investments Investments may include oil and gas interests, solar energy, 

biofuels, water power, wind energy, eco-friendly stocks and 

bonds, or energy-efficient housing.

Equipment leasing Equipment leased to a business at a flat monthly rate for a 

specified time period.

Foreign-based assets Investment options include foreign exchange currency and 

property located overseas.

Farming interests Interest in a farm or other property that sells agricultural 

products, such as lumber, or milk and wool from animals.

Precious metals Approved gold, silver, platinum, and palladium bullion and 

certain coins.

Private equity Investments in privately held enterprises, such as private 

company stock or interests in limited liability companies or 

limited partnerships. 

Promissory notes

(secured)

A form of debt backed by collateral, such a mortgage or deed of 

trust, in which a borrower promises to return the lender’s funds 

and make fixed-interest payments to the lender in exchange for 

borrowing the money.

Promissory notes 

(unsecured)

A form of debt not backed by collateral in which a borrower 

promises to return the lender’s funds and make fixed-interest 

payments to the lender in exchange for borrowing the money.

 12RMDs generally apply to participants who have retired and remain in the plan (or 

another qualified tax-deferred account) after age 701⁄2. 26 U.S.C. §§ 401(a)(9) and 

408(a)(6). RMDs generally do not apply to plan participants older than 701⁄2 continuing to 

work and not yet retired. 26 U.S.C. § 401(a)(9)(C)(ii). Typically, participants age 701⁄2 or 

older who have not self-initiated withdrawals will automatically receive payments 

administered by their recordkeeper or third-party administrator pursuant to RMD 

calculations.

13A custodian is not precluded from holding both conventional and unconventional assets. 

Investments
Page 7 GAO-17-102 Unconventional Assets

Asset type Asset description

Real estate Investment in real property options, such as rental housing, 

commercial buildings, and undeveloped land.

Tax liens Investment in liens imposed on tax-delinquent real property or 

personal property that if unpaid can result in the assumption of 

the property deed. 

Virtual currency A type of digital money existing only in cyberspace (e.g., 

Bitcoin) that is used and accepted among the members of a 

specific virtual community. 

Source: GAO analysis of IRS and industry information. | GAO-17-102

Under Title I of ERISA, fiduciaries of ERISA-covered plans, such as 

conventional 401(k) plans, must carry out their responsibilities prudently 

and solely in the interest of the account participants and beneficiaries.14

For ERISA-covered plans, a fiduciary includes a person who has 

discretionary control or authority over the management of an account, 

including management over the account’s assets, or anyone who, for a 

fee or other compensation, renders investment advice with respect to an 

account.15 Among other duties, fiduciaries have a responsibility to select 

and monitor investment options and service providers; report account 

information to the federal government and to participants; and ensure that 

the services provided to their account are necessary and that the cost of 

those services is reasonable.16 Many actions needed to operate a 

qualified retirement account involve fiduciary decisions, whether an 

individual or plan hires someone to manage the plan or manages the 

 14Title I, Part 4 of ERISA generally applies to plans that are established or maintained by 

an employer or an employee organization or both. The prudence and exclusive benefit 

requirements of Title I generally do not apply to IRAs, which are primarily regulated under 

Title II of ERISA and section 408 of the Internal Revenue Code, or to solo 401(k) plans.

15Under ERISA, a fiduciary is anyone, such as a sponsor, trustee, investment adviser, 

service provider, or other person, to the extent they exercise any discretionary authority or 

control over plan management or any authority or control over the management or 

disposition of plan assets, or renders investment advice respecting plan money or 

property for a fee or other compensation, or have discretionary authority or responsibility 

for plan administration. 29 U.S.C. § 1002(21)(A).

16In April 2016, DOL issued a final rule defining who is a fiduciary as a result of giving 

investment advice to plan officials, plan participants, and beneficiaries and IRA owners. 

The final rule describes the kinds of communications that would constitute investment 

advice and describes the types of relationships in which such communications give rise to 

fiduciary investment advice responsibilities. Implementation of the rule is set to begin in 

April 2017. Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement 

Investment Advice, 81 Fed. Reg. 20,946 (Apr. 8, 2016).

Roles and Responsibilities
Page 8 GAO-17-102 Unconventional Assets

account themselves.

17 However, unlike conventional 401(k) plans, solo 

401(k) plans are generally not covered under Title I of ERISA, including 

the fiduciary standards in Part 4, or subject to DOL oversight because 

they are sponsored by employers that have no employees.

The IRC generally requires plans (including certain IRAs and 401(k) 

plans) to hold plan assets in a trust fund maintained for the exclusive 

benefit of employees and their beneficiaries. The IRC establishes the 

requirements that a trust must satisfy in order to “qualify” for favorable tax 

treatment.18 In some cases, both the employer and employee may 

contribute to the trust. The assets are held in trust until distributed to the 

employees or their beneficiaries according to the plan’s provisions.

Individuals who own a business or are self-employed can establish a 

401(k) plan that allows unconventional assets, a solo 401(k) plan, either 

on their own or by consulting a professional or financial institution—such 

as a bank, mutual fund provider, or insurance company—to help them 

establish and maintain the plan. Because solo 401(k) plans generally do 

not have to comply with ERISA Title I, Part 4 fiduciary requirements, the 

individual, as plan sponsor, may also serve as the plan fiduciary and 

trustee.

Individuals can establish an IRA with a bank or qualified firm that acts as 

a trustee or custodian of investments contributed by the individual or 

purchased with funds contributed by the individual.19 A traditional IRA is 

established after a custodial agreement (IRS Form 5305) is fully executed 

by both the grantor (account owner) and the trustee (custodian).20 IRS 

developed a model Form 5305 and permits custodians who use the form 

to incorporate additional provisions as long as the provisions are agreed 

to by the account owner and custodian, and comply with federal and state 

 17Some functions, such as those related to establishing a plan and choosing its design 

features, are considered settlor functions that are not subject to ERISA’s fiduciary 

standards. However, once the sponsor embarks on implementation of the strategy, such 

action would fall within the realm of its fiduciary role, requiring the sponsor to operate in 

the best interest of participants and beneficiaries.

1826 U.S.C. § 401(a).

19A trustee is a bank or such other person who demonstrates to the satisfaction of the 

Secretary of the Treasury that the manner in which the trust is administered is consistent 

with the requirements under section 408. 26 U.S.C. § 408(a)(2).

20IRS Form 5305 series includes similar model custodial agreements for several types of 

IRAs.
Page 9 GAO-17-102 Unconventional Assets

requirements.21 These additional provisions typically outline the parties’

roles and responsibilities. Custodians are not required to use the model 

form, and are instructed not to file it with IRS.

.

IRA custodians have several reporting requirements with respect to IRA 

investments. IRA custodians are required to submit annually a Form 5498 

IRA Contribution Information to IRS for each IRA account under 

custody.22 As part of this reporting, IRA custodians must ensure that all 

IRA assets (including those not publicly traded) are valued annually at 

their fair market value (FMV), and IRS requires custodians to report the 

year-end aggregate FMV of all investments in an IRA.23 Starting with tax 

year 2015, IRS required custodians to report the aggregate FMV of 

investments falling in specified categories of unconventional assets and 

to identify the category in which the assets belonged. Custodians are also 

required to submit Form 1099-R Distributions From Pensions, Annuities, 

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., each 

year that an IRA withdrawal took place and detail the total distributions 

from the account during the calendar year. Form 1099-R also provides 

information about the IRA distributions, such as whether the distributions 

were taken before age 591⁄2.24

A 401(k) plan’s annual reporting requirements are generally satisfied 

through filing a Form 5500 Annual Return/Report of Employee Benefit 

 21IRS instructions for the Form 5305 allow the provisions to include things such as 

definitions, investment powers, voting rights, exculpatory provisions, amendment and 

termination, removal of the trustee, trustee’s fees, state law requirements, beginning date 

of distributions, accepting only cash, treatment of excess contributions, and prohibited 

transactions with the grantor. In addition, the parties can attach additional pages to the 

agreement.

22For additional information on Form 5498, why IRS began collecting data on 

unconventional assets, and how they plan to use the data they receive, see GAO, 

Individual Retirement Accounts: IRS Could Bolster Enforcement on Multimillion Dollar 

Accounts, but More Direction from Congress Is Needed, GAO-15-16 (Washington, D.C.: 

Oct. 20, 2014).

23The total FMV of an IRA is the aggregate value of contributions and rollovers into the 

IRA, distributions from the IRA, investment earnings (such as interest and dividends), and 

any change in the market value of assets held in the IRA.

24Early distributions other than for specific exceptions are subject to an additional 10 

percent tax, whereas distributions after age 591⁄2 are generally not subject to an additional 

10 percent tax on the amount distributed.

Reporting Requirements
Page 10 GAO-17-102 Unconventional Assets

Plan (Form 5500) and its accompanying schedules.25 The Form 5500 is 

the primary source of information collected by the federal government 

regarding the operation, funding, expenses, and investments of employee 

benefit plans. The Form 5500 reporting requirements vary depending on 

the size and type of plan: plan sponsors required to submit the long form 

must fill out multiple schedules and attachments that collect information 

on particular aspects of the plan, such as the value and types of plan 

assets; plans allowed to complete the short form have fewer reporting 

requirements.

IRA owners and 401(k) plans are not permitted to engage in certain 

prohibited transactions. Prohibited transactions generally fall into two 

categories:

• Involving disqualified persons. An IRA owner and 401(k) plan are 

prohibited from engaging in a transaction with a range of entities, 

including a fiduciary, a person providing services, or members of the 

IRA owner’s family, including a spouse, ancestor, or descendant.

• Involving self-dealing. An IRA owner and 401(k) plan fiduciary are 

prohibited from engaging in a transaction where the account owner or 

the fiduciary benefits from the asset prior to retirement.26

Unlike a 401(k) plan sponsor, who has an opportunity to voluntarily 

correct some prohibited transactions after they occur, IRA owners face 

adverse tax consequences when engaging in a prohibited transaction.27

Examples of a prohibited transaction in an IRA may include: (1) directing 

the IRA to purchase a vacation home as a rental property for personal 

use; (2) selling their own property to the IRA; and (3) taking a salary from 

an IRA-funded business. Specifically, if the IRA owner engages in a 

prohibited transaction, the IRA loses its tax-favored status as an IRA, and 

the account is treated as distributing all of its assets to the IRA owner at 

 25Additional information on the Form 5500 can be found at 

https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-comp

liance/reporting-and-filing/form-5500.

26“Self-dealing” specifically refers to the prohibited transactions set forth in 26 U.S.C. § 

4975(c)(1)(D)-(F) and 29 U.S.C. § 41106(a)(1)(D) and 406(b). 

27DOL established the Voluntary Fiduciary Correction Program to encourage employers 

and plan fiduciaries to comply with ERISA by allowing them to self-correct certain 

violations of the law.

Prohibited Transactions
Page 11 GAO-17-102 Unconventional Assets

the FMV on the first day of the year in which the transaction occurred.28

The IRA owner may also be subject to a 10 percent additional tax on 

early distributions unless an exception applies.

29

Earnings and profits made in tax-favored savings vehicles are generally 

reinvested in the account with taxes deferred until distribution. However, 

two circumstances can generate current tax liability for retirement account 

owners:

• Unrelated Business Taxable Income (UBTI): Unrelated business 

taxable income is gross income generated from an ongoing trade or 

business (less allowable deductions) that is not related to the exempt 

or tax-deferred entity, such as an IRA. An IRA or 401(k) plan that 

earns $1,000 or more of gross income from an unrelated business 

must file Form 990-T with IRS and pay related taxes.30

• Unrelated Debt-Financed Income (UDFI): Unrelated debt-financed 

income is a form of UBTI. If an asset purchased by an IRA is debtfinanced (e.g., a mortgage on a rental property), income produced by 

that asset could be subject to taxes.

Multiple federal, state, and independent entities provide regulatory 

oversight for retirement accounts invested in unconventional assets, 

although agency jurisdiction varies depending on the type of provider, the 

state in which it conducts business, and type of plan offered. Table 2 

 2826 U.S.C. § 408(e)(2). 

2926 U.S.C. § 72(t).If a disqualified person other than the IRA owner engages in a 

prohibited transaction, that person may be liable for a 15 percent excise tax on the amount 

of the prohibited transaction and a 100 percent additional tax if the transaction is not 

corrected. 26 U.S.C. § 4975(a) and (b).

30IRS, Form 990-T, Exempt Organization Business Income Tax Return is used to report 

unrelated business income and unrelated business income tax liability. 

Tax Liability in Retirement 

Accounts

Regulatory Framework
Page 12 GAO-17-102 Unconventional Assets

provides a summary of the regulatory activities of some of the major 

entities involved in overseeing these accounts.31

Table 2: Federal, State, and Independent Entities Providing Oversight for Retirement Accounts Invested in Unconventional 

Assets

Entity Oversight role

Department of Labor 

(DOL) 

Enforces laws and regulations governing 401(k) plans under Title I of the Employee Retirement Income 

Security Act of 1974 (ERISA). Solo 401(k) plans, as one-participant plans sponsored by a business owner 

with no employees are not subject to Title I and do not fall under DOL’s jurisdiction. DOL interprets the 

prohibited transaction provisions relating to IRAs. The Internal Revenue Service is responsible for enforcing 

those provisions. DOL may grant exemptions to prohibited transactions. DOL also collects complaint 

information and offers assistance to participants in Title I retirement plans.

Financial Industry 

Regulatory Authority 

(FINRA)

Regulates broker-dealers who buy, sell, and trade investments often found in retirement accounts. Oversees 

aspects of the securities business: from registering and educating industry entities to examining securities 

firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the 

investing public; providing trade reporting and other industry utilities; and administering the largest dispute 

resolution forum for investors and registered firms. Investors and others can submit a complaint to alert 

FINRA to any potentially fraudulent or suspicious activities by brokerage firms or broker-dealers.

Internal Revenue 

Service (IRS)

Enforces Title II of ERISA and helps taxpayers understand and meet their tax responsibilities. As part of that 

effort, multiple IRS units are responsible for enforcing IRA tax laws, enforcing rules on 401(k) plan 

contribution limits and taxation on distributions, and conducting outreach to increase taxpayers’

understanding of the laws.

Office of the 

Comptroller of the 

Currency (OCC)

Charters, regulates, and supervises all national banks and federal savings associations that can also serve 

as IRA custodians as well as federal branches and agencies of foreign banks. OCC collects complaint 

information from the public about these entities.

Securities and 

Exchange Commission 

(SEC)

Oversees key elements of the securities industry, including securities exchanges, securities broker-dealers, 

investment advisers, and mutual funds. As part of these efforts, SEC regulates investment advisers who, in 

exchange for compensation, are engaged in the business of providing investment advice regarding securities 

that may be held in retirement accounts. SEC collects complaint information from members of the public 

regarding possible violations of federal securities laws.

State banking 

regulators

Supervise nearly 4,850 state-chartered financial institutions, including some IRA custodians, and regulate a 

variety of nonbank financial services providers. They also generally investigate consumer complaints filed 

against licensed entities and direct appropriate remedial action if the violations are substantiated.

 31The Federal Deposit Insurance Corporation (FDIC) and the National Credit Union 

Administration (NCUA) also play a role with regards to these accounts. FDIC supervises 

insured state-chartered banks that are not members of the Federal Reserve System, as 

well as insured state savings associations and insured state-chartered branches of foreign 

banks; insures the deposits of all banks and thrifts that are approved for federal deposit 

insurance; resolves all failed insured banks and thrifts; and may be appointed to resolve 

large bank holding companies and nonbank financial companies that are supervised by 

the Federal Reserve. Also, the FDIC has backup supervisory responsibility for all federally 

insured depository institutions. NCUA regulates, charters, and supervises federallychartered credit unions and insures deposits in federal and most state-charted credit 

unions.
Page 13 GAO-17-102 Unconventional Assets

Entity Oversight role

State securities 

administrators

Regulate the securities industry and enforce the securities laws within their states. As part of their efforts, 

administrators investigate investor complaints and potential cases of investment fraud, including enforcement 

cases involving issuers of unconventional assets. In addition, the administrators generally collect and track 

complaints and other inquiries received from members of the public regarding fraudulent practices or potential 

violations of state securities laws.

Source: GAO analysis of information from federal, state, and independent entities. | GAO-17-102

To date, federal data collection efforts capture limited information on the 

unconventional asset holdings in IRAs and solo 401(k) plans, making 

their overall prevalence unknown. Historically, IRS has not collected FMV 

data specific to unconventional asset holdings in IRAs. For tax year 2015, 

IRS began requiring IRA custodians to report selected information on 

unconventional asset holdings in IRAs.32 IRS did not fund electronic 

 32Box 15b on the form provides eight codes for identifying the types of unconventional 

assets: (A) Stock or other ownership interest in a corporation that is not readily tradable on 

an established securities market; (B) Short- or long-term debt obligation that is not traded 

on an established securities market; (C) Ownership interest in a limited liability company 

or similar entity (unless the interest is traded on an established securities market); (D) 

Real estate; (E) Ownership interest in a partnership, trust, or similar entity (unless the 

interest is traded on an established securities market); (F) Option contract or similar 

product that is not offered for trade on an established option exchange; (G) Other asset 

that does not have a readily available fair market value; and (H) More than two types of 

assets (listed in A through G) are held in this IRA.

Full Extent of 

Retirement Account 

Investment in 

Unconventional 

Assets Is Unknown, 

but Custodians 

Reported Nearly Half 

a Million Accounts 

Invested in 

Unconventional 

Assets in 2015

Federal Government 

Collects Limited Data on 

Unconventional Asset 

Holdings in Retirement 

Accounts
Page 14 GAO-17-102 Unconventional Assets

compilation for the 2015 data but plans to electronically compile data for 

tax year 2016 that will be filed in 2017. As of November 2016, IRS has 

not provided a date on when the new IRA asset type data will be available 

for further analysis. While estimates have been reported in recent years 

regarding the aggregate investment in IRAs that may hold unconventional 

assets, we could not determine the validity of these estimates based on 

the sources of data used to support them.33 In addition, DOL collects no 

data on unconventional asset holdings in solo 401(k) plans because 

sponsors of solo 401(k) plans are generally not required to report their 

investment holdings. As a result, federal data collection on 

unconventional assets is incomplete and unspecific with respect to the 

types of assets held in these accounts. (See table 3.)

Table 3: Current Extent of Federal Data Collection on Retirement Accounts with 

Unconventional Assets

IRAs Solo 401(k) 

plans b

Number of accounts with unconventional assets ● ○

Total value of unconventional assets in accounts ● ○

Types of unconventional assets in accounts ◒a ○

Value by unconventional asset type in accounts ◒ ○

Legend: ● information collected ◒ partial information collected ○no information collected

Source: GAO analysis of Form 5498 for individual retirement accounts (IRA) and the Form 5500 series for solo 401(k) plans. | 

GAO-17-102

a

Beginning with tax year 2015, the Internal Revenue Service (IRS) requires custodians to separately 

identify the fair market value of IRA investment in unconventional assets including: nonpublicly traded 

stocks and real estate. Custodians are also to enter up to two codes identifying the unconventional 

asset types, but IRS does not require custodians to separately report the fair market value of each 

type of unconventional investment.

b

Solo 401(k) plans are qualified retirement plans designed for the self-employed or owners of small 

businesses with no employees (beyond the owner and their spouse). Sponsors of solo 401(k) plans 

are generally not subject to filing requirements under Title I of the Employee Retirement Income 

Security Act of 1974. Instead, IRS requires them to file either a Form 5500-EZ on paper or a Form 

5500-SF electronically to satisfy certain annual reporting and filing requirements imposed by the 

Internal Revenue Code. However, IRS requires these filers to report only total plan assets and does 

not require them to identify or report separately on investment in unconventional assets. Further, 

 33For example, in 2011 SEC’s Office of Investor Education and Advocacy and the North 

American Securities Administrators Association (NASAA) issued a joint investor alert that 

included an estimate compiled from various sources that investors held approximately 2 

percent of total IRA retirement funds ($94 billion) in IRAs that may allow investment in 

unconventional assets. A more recent industry estimate valued investments in these IRAs 

at $152 billion, and attributed the source to Investment Company Institute reports. 

However, an Investment Company Institute official told us that the institute has never 

reported on the value of unconventional assets held in IRAs. 
Page 15 GAO-17-102 Unconventional Assets

sponsors of solo 401(k) plans with less than $250,000 in assets are generally not required to file any 

information on plan investment with federal regulators.

Seventeen of the 26 custodians we identified who allow investment in 

unconventional assets reported holding an aggregate of more than 

488,000 retirement accounts at the end of calendar year 2015. 

Custodians reported that owners of these retirement accounts invested in 

a range of unconventional asset types and identified real estate, private 

equity, and hedge funds as the most common asset types held in these 

accounts. In addition, they reported that account owners invested in 

Limited Liability Companies (LLC) and limited partnerships, precious 

metals, promissory notes, church bonds, and private placements. 

Custodians also reported that these accounts have an aggregate value of 

approximately $50 billion; however, we could not determine whether the 

accounts exclusively held unconventional assets or, if not, which portion 

was attributable to cash or publicly traded assets held in the accounts.

IRAs made up the vast majority of accounts and assets reported, and 

solo 401(k) plans constitute less than 1 percent of reported accounts and 

assets. (See table 4.)34

Table 4: Custodian-Reported Aggregate Number and Value of Retirement Accounts 

Investing in Unconventional Assets by Account Type, as of December 31, 2015

IRAsa

Solo 401(k) 

plans Total

Aggregate number of 

accounts

485,517 2,816 488,333

Aggregate value of 

accounts

$49,768,207,085 $187,692,662 $49,955,899,747

Source: GAO analysis of data on individual retirement accounts (IRA) and solo 401(k) plans provided from 17 custodians. | 

GAO-17-102

aWe aggregated custodian responses for any IRAs invested in unconventional assets.

The aggregate data that custodians provided help establish a baseline of 

retirement account investment in unconventional assets, but these data 

are not comprehensive in that they exclude several other potential 

sources of such investment. For example, industry representatives stated 

 34The Investment Company Institute reported that the total assets in IRAs and 401(k) 

plans at the end of 2015 were $7.3 trillion and $4.7 trillion, respectively. See Investment 

Company Institute, 2016 Investment Company Fact Book (Washington, D.C.: May 4, 

2016).

Custodians Report Nearly 

Half a Million Retirement 

Accounts Are Invested in 

Unconventional Assets
Page 16 GAO-17-102 Unconventional Assets

that other banks, trust companies, and financial service providers may 

accommodate investments in unconventional assets, such as commercial 

real estate, for their high net worth clients. Additionally, some individuals 

with 401(k) plans who invest in unconventional assets serve as plan 

trustee and would not need to retain the services of a custodian to 

process account transactions. Therefore, it is likely that the total number 

of accounts invested in unconventional assets would be higher.

Transferring existing retirement savings to a new account or plan that 

allows investment in unconventional assets expands the roles and 

responsibilities of account owners for managing aspects of their 

accounts.35 Many individuals seeking to set up a new account may be 

accustomed to tax-favored status for their IRA or 401(k) plan, but their 

decision to invest in unconventional assets is accompanied by a range of 

responsibilities that may be new and unfamiliar. For example, all 20 

custodial agreements we reviewed required individuals to agree to be

responsible for directing their investments; and oversee the selection, 

management, monitoring, and retention of all investments in the account. 

In addition, while account owners may seek the assistance of 

knowledgeable third parties, such as attorneys, accountants, tax advisors, 

and financial planners, the account owners bear the consequences of any 

mistakes made in managing their accounts. According to DOL, IRA and 

401(k) plan investors often lack investment expertise and must rely on 

experts, but are unqualified to assess the quality of the expert’s advice or 

guard against its conflicts of interest. Moreover, DOL notes that many of 

these experts often receive fees (or other forms of compensation) that 

may introduce conflicts of interest between them and the plan officials, 

plan participants, and the IRA investors they advise.

Selecting an Appropriate Account Type. Individuals seeking to save for 

retirement by investing in unconventional assets must first determine 

which type of retirement savings vehicle and investment aligns with their 

savings goals. Nine of 17 custodians reported that clients want to invest 

in unconventional assets for a variety of reasons, including avoiding the 

stock market, diversifying retirement portfolios, investing in a tangible or 

familiar asset, or investing in a company not yet publicly traded. One 

custodian said that most individuals seeking investment in unconventional 

assets did not own their own businesses, and that it was more common 

for these individuals to establish an IRA with a custodian that allowed this 

 35Individuals can also fund an account by making an initial contribution. 

Retirement Account 

Owners Investing in 

Unconventional 

Assets Are 

Responsible for 

Account Management 

and Compliance
Page 17 GAO-17-102 Unconventional Assets

kind of investment. Self-employed individuals or owners of small 

businesses who employ no other full-time employees may qualify to 

sponsor a solo 401(k) plan. Two service providers who advise their clients 

on creating solo 401(k) plans to invest in unconventional assets said that 

their clients preferred the 401(k) plan for its higher annual contribution 

limits and the ability to take participant loans.36

Establishing and Funding an Account. An individual must take several 

steps to establish and fund an account that allows investment in 

unconventional assets. First, individuals opening an IRA must find a 

custodian willing to administer the asset.37 Eighteen of the 21 service 

providers reported that in their experience most individuals wanting to set 

up an account had a specific investment or asset type in mind before 

making initial contact with them. Twelve of the 17 custodians reported 

that they placed some restriction on the types of unconventional assets 

that they would allow. For example, they reported that they did not allow 

investment in certain assets, including foreign-based assets, precious 

metals, person-to-person promissory notes, or single-member LLCs. One 

custodian noted that such restrictions were necessary because some 

assets were administratively infeasible for its business plan. For example, 

a custodian who does not specialize in foreign-based assets may not 

accept custody of these types of assets. Second, prospective IRA owners 

must sign a custodial agreement that outlines the respective roles and 

responsibilities of the account owner and custodian over the lifecycle of 

an account. Our analysis of agreements available on 20 custodians’

websites found that 18 custodians used IRS’s model custodial agreement 

to help IRAs conform to IRS requirements. The model agreement 

includes several articles that IRS has approved regarding contribution 

limits, prohibited assets, RMDs, and the treatment of beneficiaries, 

among other things. The agreement also provides custodians with an 

opportunity to amend the form with additional provisions as long as these 

provisions comply with applicable requirements of federal and state law. 

Third, the individual must authorize the custodian to fund the new account 

 36Unlike an IRA, 401(k) plans, including solo 401(k) plans, may allow participants to take a 

loan from their account. The IRC sets the maximum amount that the plan can permit as a 

loan, generally, as (1) the greater of $10,000 or 50 percent of a participant’s vested 

account balance or (2) $50,000, whichever is less. 26 U.S.C. § 72(p)(2).

37Individuals wanting to set up a solo 401(k) plan must adopt a written plan document, 

arrange a trust fund for the plan’s assets, and develop a recordkeeping system. Once the 

plan has been established, the plan sponsor can set up a banking account for the plan 

and fund this account through a rollover from another qualified retirement account. 
Page 18 GAO-17-102 Unconventional Assets

either through a new contribution, or through a transfer or rollover of 

funds from another qualified retirement account.

Purchasing Assets. The choice to purchase unconventional assets rather 

than publicly traded stocks and bonds in a retirement account marks a 

significant shift in the balance in account management responsibilities 

toward the account owner. On the one hand, solo 401(k) account owners 

sponsor the plan and can serve as its trustee, allowing them to purchase 

any asset permissible in the plan documents and deposit the asset in 

their designated trustee account. On the other hand, IRA owners 

investing in unconventional assets must locate an asset, determine its 

suitability for their retirement goals, and conduct due diligence on the 

investment and the investment sponsor. In addition, to finalize the 

purchase, these IRA owners must collect, review, and prepare all

purchase documents and provide them to the custodian to execute the 

purchase on behalf of the IRA. IRA owners and custodians must 

complete this sequence of tasks each time an asset is placed in the 

account. (See table 5.)

Table 5: Examples of Account Owner and Custodian Responsibilities Associated 

with the Purchase of Unconventional Assets in an Individual Retirement Account 

(IRA)

Responsibility Account owner Custodian

Determining the appropriateness of an asset ●

Determining the risk associated with an asset ●

Reviewing for potential prohibited transactions ●

Arranging with the investment sponsor to purchase 

an asset

●

Providing documentation to support the asset 

purchase

●

Providing direction to disburse funds to purchase 

asset

●

Verifying that funds are correctly invested ●

Determining an asset’s administrative feasibility ●

Disbursing funds from IRA to purchase asset ●

Ensuring purchased asset is titled in the name of IRA ●

Facilitating the safekeeping of certificates, notes, or 

deeds

●

Providing periodic statements showing account’s 

value

●

Source: GAO analysis of available custodian information. | GAO-17-102
Page 19 GAO-17-102 Unconventional Assets

The amount and type of documentation that account owners must provide 

to custodians before an asset can be purchased can vary considerably 

depending on the type of asset being purchased. Our analysis of 

custodian documentation found that assets like promissory notes or 

precious metals require minimal documentation from the account owner, 

while other assets, such as real estate or private equity, can require the 

account owner to provide considerable documentation before a purchase 

can be made. Depending on the asset type selected, an account owner 

may have to expend considerable time and effort to finalize an asset 

purchase. (See table 6.)

Table 6: Examples of Documentation that Selected Custodians Require Before 

Certain Assets Can Be Purchased for an Individual Retirement Account (IRA)

Asset Documentation required for purchase

Unsecured promissory 

note

Investment authorization with funding instructions

Original notarized note

Note servicing agreement (if applicable)

Amortization/payment schedule

Precious metals Dealer’s contact information

Purchase authorization describing the quantity, metal type, 

form (bullion or coin), weight, and price

Private equity Subscription documents (or other purchase agreement)

Investment representation letter

Articles of incorporation

Certificates of limited partnership

Articles of organization

Other organizational documents

Bylaws

Shareholder agreements

Partnership agreements

Operating agreements

Trust instruments

Private placement memo

Real estatea Request for earnest money deposit

Purchase contract

Current property tax bill

Legal description of property

Copy of executed property management agreement

Instructions for sending check/wire at closing

Copy of title insurance

Copy of liability insurance
Page 20 GAO-17-102 Unconventional Assets

Asset Documentation required for purchase

Property appraisal

Settlement statement and closing documents

All loan documents (if property is being financed)

Source: GAO analysis of selected custodial forms. | GAO-17-102

a

The documentation custodians require may change depending on the type of real estate purchased. 

For example, custodians may require account owners to produce lender documents for mortgaged 

properties, environmental reports for commercial or industrial properties, and property management 

agreements for income-producing properties.

Some IRA owners may choose to exercise greater control and limit a 

custodian’s direct involvement in the purchase of unconventional assets 

by adding a checkbook control feature to their IRA. In order to obtain 

checkbook control, the account owner must first establish an LLC that is 

owned by the IRA. Once this new LLC is established, a business 

checking account linked to IRA funds is set up, and account owners are 

named manager of the LLC with control of the checkbook. Using the 

checkbook owned by the IRA’s LLC, the account owner can take 

advantage of time-sensitive offers and purchase assets directly from 

investment sponsors without having to wait for a custodian to execute a 

purchase or sale.

Account Management and Compliance. Account owners who invest in 

unconventional assets typically agree to become responsible for the dayto-day management of their accounts and ensuring that the account 

remains compliant with laws and regulations, according to our review of 

selected custodial agreements. As an IRA custodian can only act on the 

direction of the account owner, an account owner generally must inform 

the custodian of the many tasks needed to maintain assets in their 

account—such as purchases, sales, earned income, payments due, 

requested distributions, and changes in the account’s value—and provide 

sufficient documentation to the custodian to facilitate each account 

transaction on their behalf. (See table 7.)
Page 21 GAO-17-102 Unconventional Assets

Table 7: Account Owner and Custodian Responsibilities Associated with the Ongoing Individual Retirement Account 

Management and Maintenance, Based on Review of Selected Custodial Agreements

Responsibility Account owner Custodian

Account administration Directs all investment transactions, including 

reinvestment of dividends, interest, and sales proceeds, 

as well as payments of insurance premiums, real estate 

taxes, utilities, or other charges (including penalties) 

related to an IRA investment.

Provides documentation to support all directed account 

transactions.

Ensures adequate liquidity to meet all account 

obligations.

Conducts ongoing monitoring of investment 

performance, investment sponsor performance, and for 

potential prohibited transactions.

Executes account owner’s directions based 

on documentation provided.

Reports known prohibited transactions and 

distributions from the account to regulators.

Account recordkeeping Ensures custodian receives accurate and complete 

information on all account transactions; verifies content 

of periodic account statements.

Maintains records of all account transactions 

and issues periodic account statements to 

account owner.

Tax reporting Monitors account for possible unrelated business income 

tax liability; prepares Form 990-T to report taxes; and 

directs custodian to disburse funds to pay tax liability.

Provides custodian with annual fair-market value updates 

for all hard-to-value assets in the account.

Collects and files prepared Form 990-T and 

releases funds from the account to pay taxes 

owed.

Reports the aggregate fair market value of all 

assets in an account and the owner-provided 

fair market value for certain categories of 

hard-to-value assets to Internal Revenue 

Service on an annual basis.

Asset custody None Facilitates the safekeeping of original 

purchase documents and some physical 

assets.

Source: GAO analysis of IRS and selected custodial information. | GAO-17-102

The extent of custodian involvement in the ongoing management of an 

account can depend on the types of unconventional assets held in the 

account. For example, one custodian mentioned that promissory notes 

that promised a balloon payment of principal and interest at the end of a 

specified term generally required less recordkeeping from the custodian. 

The same custodian and another described the management of a real 

estate holding in an IRA as being a labor-intensive, manual process. In 

this case, a custodian would coordinate with the account owner to pay all 

expenses from IRA funds, such as maintenance, improvements, property 

taxes, condominium association fees, general bills, and insurance, and 

return any related income to the IRA.
Page 22 GAO-17-102 Unconventional Assets

Account owners need to be mindful of fees and expenses associated with 

plan investments and services to determine whether they continue to be 

reasonable in light of the services provided. Given that retirement 

accounts must be held in trust, IRA custodians generally charge a range 

of administrative and transactional fees for the services they provide 

throughout the lifecycle of an IRA. While some transactions like precious 

metal storage lend themselves to a flat fee, other transactions like real 

estate purchases can involve multiple transactions requiring greater 

involvement by a custodian, leading to a higher incidence of fees that 

must be paid out of the account.38 In reviewing fee disclosures from 

custodians who made them publicly available on their websites, we found 

that custodians generally charged fees for similar services—account 

establishment, account maintenance, transactional fees, and account 

termination—but the type of fee structure used and amounts of fees 

charged varied among custodians. Custodians’ fee structures generally 

included a (1) flat fee; (2) a per-asset fee in an account; or (3) a fee 

based on a percentage of an account’s value. Some fee structures 

consisted of multiple categories, such as a flat fee plus a per-asset fee. 

The fee structure used can affect annual account costs, as shown in table 

8.

Table 8: Examples of How Selected Custodians’ Fee Structures for Annual Account Maintenance Could Affect the Overall 

Cost of Holding an Unconventional Asset Valued at $100,000

Example Flat fee($) Per asset fee ($)

Based on account value 

(basis points)a Cost to account ($)

b

1 65 — — 65

2 600 350 — 950

3 95 48 — 143

4 320 120 — 440

5 195 — 26 455

6 — — 120 1,195

7 — — 60

($2,000 minimum)

2,000

Source: GAO analysis of publicly available custodian fee disclosures. | GAO-17-102

 38As we have previously reported, account fees can significantly decrease retirement 

savings over the course of an account owner’s career. Even a small fee deducted from an 

account today could significantly reduce the account’s balance years later had it remained 

in the account. See GAO, Private Pensions: Changes Needed to Provide 401(k) Plan 

Participants and the Department of Labor Better Information on Fees, GAO-07-21 

(Washington, D.C.: Nov. 16, 2006).
Page 23 GAO-17-102 Unconventional Assets

a

One basis point is equal to one one-hundredth of one percentage point (0.01%).

b

Costs associated with fees charged per asset were calculated by multiplying the number of assets 

(i.e., one) by the fee charged per asset. Costs associated with fees based on account value were 

calculated by multiplying the account value (i.e., $100,000) by the fee percentage. The cost 

calculations in the table were derived from the fee structures of seven separate custodians whose fee 

disclosures we reviewed. We selected these examples to demonstrate the range of fees and how 

fees were assessed. The cost calculations are intended for illustrative purposes and may not 

represent the total cost of holding unconventional assets in an account. Accounts holding 

unconventional assets may also be subject to other transactional or service fees that are not included 

here.

Finally, one fee disclosure we reviewed reminded account owners of their 

responsibility to monitor their accounts, noting that unfunded accounts 

and accounts with zero value would continue to incur fees until the 

account owner provided written instruction to close the account.

IRA owners with checkbook control can perform some tasks associated 

with maintaining the account without a custodian’s assistance and thus 

avoid some of the custodian’s administrative and transaction fees related 

to these services. For example, an IRA owner, as manager of the LLC 

owned by the IRA, can manage several administrative services 

associated with rental real estate in an IRA, such as paying property 

taxes, insurance premiums, and utility bills, and writing checks from the 

LLC bank account to cover property repairs and maintenance. However, 

whether using a custodian or not, the account owner, in signing a 

custodial agreement, agrees to be responsible for ensuring that 

transactions do not run afoul of the prohibited transaction rules and for 

determining whether transactions constitute contributions to or 

distributions from the IRA.

Closing an Account and Distributing Assets. As with purchasing assets 

and maintaining an account on an ongoing basis, account owners 

investing in unconventional assets are responsible for overseeing the 

distribution of assets from their accounts, such as determining the amount 

of any RMD and directing custodians to release the funds. Whether 

seeking to liquidate the assets in an account, take physical possession of 

the assets, or transfer assets to another custodian, account owners must 

direct the custodian to facilitate the removal or transfer of assets from the 

IRA.

• Distribution of assets. Either the account owner or the custodian can 

initiate a distribution of account assets. Account owners can submit a 

distribution request to the custodian. The custodian follows the 

account owner’s directions to distribute account assets to the account 

owner either in cash or other in-kind distribution. In the case of an in-
Page 24 GAO-17-102 Unconventional Assets

kind distribution of assets, the custodian may ask the account owner 

to provide an updated FMV for the assets before completing the 

distribution. A custodian can also initiate a distribution of account 

assets for a variety of reasons, including engaging in a prohibited 

transaction or nonpayment of fees, The custodian must report 

distributions to IRS and the account owner on Form 1099-R.

• Custodian-to-custodian transfer. The account owner can establish a 

new account with another custodian and authorize a transfer of assets 

from the old account to the new account. The new custodian works 

with the account owner to re-title illiquid assets in the name of the new 

account and forwards the transfer request to the current custodian for 

execution. The original custodian confirms that all fees and expenses 

have been paid and illiquid assets are properly re-titled; and transfers 

the assets to the new custodian. Custodians are generally not 

required to report such transfers between IRAs to IRS or to account 

owners on Form 1099-R.

Some custodial agreements contain provisions that a custodian may 

initiate a distribution of unconventional assets to the account owner (or 

transfer assets to another custodian) without an account owner’s consent. 

When this occurs, the custodian notifies an account owner of the 

custodian’s intent to resign and terminate an account, and generally gives 

the account owner 30 days to exercise their right either to request a lump 

sum distribution or to name a new custodian to initiate an in-kind transfer. 

If the account owner does not name a new custodian, the custodian can 

transfer the assets in-kind to another custodian of their choosing or 

distribute the account’s assets to the account owner. If distributed to the 

account owner, the custodian must report the distribution to IRS and 

provide a Form 1099-R to the account owner.
Page 25 GAO-17-102 Unconventional Assets

IRA owners who invest in unconventional assets take on a heightened 

risk of engaging in a prohibited transaction and losing tax-favored status 

for their retirement savings. IRS officials stated that prohibited 

transactions are the most prominent compliance risk associated with 

investing IRA savings in unconventional assets. Prohibited transactions 

are more likely to arise with investments in promissory notes, private 

equity, and real estate because—unlike publicly traded stocks, bonds, 

and mutual funds—these investments can involve disqualified family 

members or other disqualified persons. Similarly, IRA investments in 

rental real estate, with its many transactions, for example, can leave IRA 

owners susceptible to a number of prohibited transactions, any one of 

which would result in the loss of the IRA’s tax-favored status, as shown in 

figure 1.

IRA Owners with 

Unconventional 

Assets Can Face 

Challenges with Tax 

Liability, Valuation, 

and Distribution, and 

IRS Provides Limited 

Guidance to Assist 

Them

Certain IRA Transactions 

Can Trigger Loss of TaxFavored Status or 

Generate Immediate Tax 

Liability

Loss of Tax-Favored Status
Page 26 GAO-17-102 Unconventional Assets

Figure 1: Examples of How an Individual Retirement Account (IRA) Owner Investing 

in Rental Real Estate May Unknowingly Engage in a Prohibited Transaction

a

Retirement account owners or other disqualified persons are not permitted to benefit from an IRA 

other than as a vehicle to save for retirement. Disqualified persons include, for example, a person 

providing services to the plan and certain family members of otherwise disqualified persons (spouse, 

ancestor, lineal descendant, and any spouse of a lineal descendant).

b

IRA owner may decide to reinvest assets in another taxable arrangement after paying any applicable 

income taxes associated with an early distribution and additional excise taxes.

Some custodians can serve as gatekeepers for obvious prohibited 

transactions, such as an IRA owner purchasing his own property for the 

IRA, though account owners must navigate the IRA tax laws and can face 

additional taxes for noncompliance. Account owners who invest in an LLC 

inside an IRA with a checkbook control feature, which limits custodial 

involvement in transactions, also take on a heightened risk of engaging in 

a prohibited transaction and losing their IRA’s tax-favored status. 

Checkbook control may offer IRA owners additional conveniences and 

reduce transaction fees charged by custodians, but these IRA owners 

must closely monitor each action for prohibited transactions. For example, 

IRA owners with checkbook control may pay IRA expenses directly 

without submitting requests through a custodian; however they must 
Page 27 GAO-17-102 Unconventional Assets

avoid paying IRA expenses with personal funds, such as writing a check 

from a personal account rather than from their IRA checkbook, or making 

payments to themselves or another disqualified person. Six of 17 

custodians said that they did not offer IRAs with checkbook control due to 

the lack of custodian oversight for prohibited transactions, among other 

things.

Earnings and profits made in tax-deferred savings vehicles generally get 

reinvested in the account without generating current federal tax liability, 

but investments in certain unconventional assets can generate ongoing 

tax liability for IRA owners.39 Certain investments can generate current 

tax liability from UBTI or UDFI earned in retirement accounts. Examples 

include using an IRA to invest in an active business or using debt to 

finance a portion of an asset’s purchase. (See fig 2.)

Figure 2: Examples of How Certain Individual Retirement Account (IRA) Investments Can Trigger Unforeseen Federal Tax 

Liability

 39Dividends, interest, certain other investment income, royalties, certain rental income, 

certain income from research activities, and certain gains or losses from the disposition of 

property are excluded when computing unrelated business income. 

Unforeseen Federal Tax 

Liability
Page 28 GAO-17-102 Unconventional Assets

IRA custodians need to monitor IRA investments for UBTI and pay any 

applicable taxes from the IRA, but we found custodians often delegated 

the responsibility for monitoring for tax liability to the account owner. IRS 

requires custodians of IRAs subject to these requirements to file a Form 

990-T for any UBTI of $1,000 or more. Most custodial agreements we 

reviewed required account owners to agree to monitor their IRA for 

business income; however, two service providers told us IRA owners 

familiar with investing in more conventional assets that do not generate 

business taxable income may not realize that the responsibility to monitor 

continues as long as the asset remains in the IRA.

Having to pay taxes from the IRA can pose additional challenges for 

account owners who invest in illiquid assets that cannot easily be sold to 

pay applicable taxes. First, illiquid unconventional assets, such as real 

estate, private equity, and promissory notes, may require account owners 

to find another investor to purchase their interest in the asset. Second, 

the account owner cannot pay the taxes with personal funds (a prohibited 

transaction) and must arrange to have a custodian pay the taxes from 

their IRA. Third, two service providers stated that IRA owners may not 

realize that once a retirement investment generates UBTI or UDFI, taxes 

must be estimated and paid quarterly if the tax is expected to be $500 or 

more, necessitating a certain level of liquidity to be maintained in the 

account.

IRA owners who invest in unconventional assets may face challenges 

meeting their responsibilities to provide updated FMV information to their 

custodian to meet IRS’s annual FMV reporting requirement because 

some unconventional assets are inherently hard to value. Some 

unconventional assets, such as precious metals, have a readily available 

FMV; other assets, such as undeveloped land and private equity, may 

require IRA owners to obtain a third-party appraisal or rely on investment 

sponsors to provide the information. Many of the custodial agreements 

we reviewed made IRA owners responsible for obtaining and providing a 

year-end FMV of unconventional assets in their accounts to the custodian 

each year. However, some custodians contact the investment sponsor 

directly to obtain an updated FMV, and if unsuccessful, may report the 

last-known FMV or the original purchase price. As a result, the FMV 

reported to IRS may not reflect a nonpublicly traded asset’s current value. 

IRA owners who fail to provide updated FMV to their custodian within a 

specified time limit run the risk of their custodian distributing their assets 

from the IRA, which could lead to a loss of the account’s tax-favored 

Difficulty Obtaining Fair 

Market Value for Hard-toValue Assets Can 

Heighten the Risk of IRA 

Noncompliance and Fraud
Page 29 GAO-17-102 Unconventional Assets

status if the owner cannot identify a successor custodian willing to hold 

the assets.40 (See fig. 3.)

Figure 3: Examples of Challenges from Individual Retirement Account (IRA) Owners 

Not Providing Updated Fair Market Value (FMV) Information to Their Custodians

aCustodians may obtain updated FMV information directly from the investment sponsor.

Even though the last-known FMV that the custodian reports to IRS may 

not necessarily reflect the current estimated value of an asset, it can be 

treated as an asset’s true value and result in federal tax consequences 

for IRA owners. For example, the last-known FMV can be used to 

calculate federal tax liability for IRA owners:

• when calculating RMDs;

• when determining the distribution amount in the event the IRA 

engages in a prohibited transaction; and

• when reporting an in-kind distribution in the event a custodian resigns 

an account (e.g., IRA owner fails to pay custodial fees or to provide 

updated FMV).

 40Three custodial agreements we reviewed specified time limits ranging from 6 to over 12 

months after the year-end FMV update was due to the custodian. 
Page 30 GAO-17-102 Unconventional Assets

Distributions of assets at their last-known FMV can be especially 

damaging if the asset distributed is found to be valueless and/or an 

updated FMV is unattainable.41 Once a distribution is made from an 

account, the value of that distribution—even if based on a last-known 

FMV—becomes the value used to determine the account owner’s federal 

tax liability. IRS identifies noncompliance with IRA distribution rules 

through automated matching of custodians’ Form 5498 and Form 1099-R 

returns with taxpayers’ income tax returns. According to an IRS official, if 

a Form 1099-R incorrectly reported a distribution of a worthless asset as 

a distribution of a valuable asset, the individual receiving the incorrect 

distribution would be responsible for proving that the asset was worthless. 

The official further noted that, to remain compliant, the taxpayer could pay 

the tax due and subsequently file a claim for a refund, or report the 

depreciation of the distributed asset’s value on an annual income tax 

filing. Our review of consumer complaints found several examples of a 

custodian’s decision to report the last-known FMV creating tax 

consequences for account owners, as shown in table 9.

Table 9: Examples of Retirement Account Owners Facing Federal Tax 

Consequences Based on an Asset’s Last-Known Fair Market Value (FMV)

Source Complaint descriptiona

Better Business 

Bureau

Custodian initiated an in-kind distribution of a real estate investment at 

its last known FMV of $25,000 to an account owner for failure to pay 

account fees. As a result, the account owner owed over $2,600 in 

current taxes for an allegedly worthless real estate investment. 

Better Business 

Bureau

Custodian initiated an in-kind distribution of private stock at its lastknown FMV of over $100,000 to an account owner for failure to pay 

account fees, triggering tax liability for the account owner. The account 

owner had not provided an updated FMV to the custodian to reflect the 

stock as worthless. 

Better Business 

Bureau

Custodian initiated an in-kind distribution of private stock at its lastknown FMV of $140,000 to an account owner after the account owner 

did not provide the custodian with updated FMV information showing 

that the company that had gone out of business and the stock had no 

value. This distribution triggered tax liability for the account owner. 

Source: GAO analysis of complaint data. | GAO-17-102

a

We did not confirm the authenticity of these complaints or investigate any of the allegations made. In 

addition, we did not collect information about all of their resolutions.

 41Reporting outdated values may also have consequences for IRS in the form of lost tax 

revenue. 
Page 31 GAO-17-102 Unconventional Assets

Custodians provided information to account owners through custodial 

agreements and other forms on owner responsibilities for providing FMV 

information for unconventional assets and supporting documentation to 

the custodian. For example, thirteen of the 20 custodial agreements we 

reviewed included custodian-specific policies informing account owners of 

their responsibilities to comply with IRS’s annual FMV reporting 

requirements. We found a range of policies, varying by asset type and 

custodian, for the FMV information that would be reported to the IRS and 

for when account owners needed to obtain independent appraisals to 

substantiate an asset’s FMV. For example, some of these agreements 

and other custodian forms:

• required IRA owners to obtain independent property appraisals for 

real estate investments at least once every 3 years;

• required IRA owners to obtain an annual comparative market analysis 

for real estate investments;

• collected FMV information directly from investment sponsors and 

other third-parties for certain assets, such as limited liability 

companies, limited partnerships, and hedge funds; and

• reported the purchase price for other assets, such as promissory 

notes.

However, some custodians also stated that requiring independent 

appraisals in years without a taxable event, such as a distribution, could 

be costly for account owners and discourage investments in certain types 

of assets.

The difficulty with obtaining and verifying FMV of certain unconventional 

assets can expose account owners to fraud and allow losses in value to 

remain undetected in retirement accounts for some time, eroding IRA 

owners’ retirement savings. In 2011 SEC’s Office of Investor Education 

and Advocacy and the North American Security Administrators 

Association (NASAA) issued a joint investor alert warning investors that 

money held in accounts that allow investments in unconventional assets 

presented attractive targets for fraud promoters seeking to engage in 

fraudulent conduct.42 The alert included multiple examples of SEC and 

state enforcement cases that involved fraudulent schemes associated 

 42SEC, Office of Investor Education and Advocacy, Investor Alert: Self-Directed IRAs and 

the Risk of Fraud. (Washington, D.C.: Sept.1, 2011). 

https://www.sec.gov/investor/alerts/sdira.pdf
Page 32 GAO-17-102 Unconventional Assets

with IRAs that allow investments in unconventional assets. SEC officials 

said that even though the prevalence of accounts holding unconventional 

assets cannot be readily determined, the potential for fraud in these 

accounts remained high and that concrete examples of fraud involving 

these accounts have been, and continue to be, well documented. Three 

state securities administrators said complaints from account owners were 

often filed years after an account had lost value because these owners 

believed the periodic account statements sent by the custodian were 

correct. For example, if custodians, and in turn account owners, rely on 

the purchase price of a promissory note as an annual FMV, they may not 

realize when a borrower has filed for bankruptcy and thereby be unable to 

pay back the note. Similarly, according to the three state securities 

administrators, investment sponsors may report incorrect FMV 

information to custodians to perpetrate fraud. Finally, some account 

owners appeared to misunderstand the custodian’s responsibility to report 

annual FMV as a form of verification, leaving these account owners open 

to holding potentially fraudulent assets in their accounts. (See table 10.)

Table 10: Examples of Potentially Fraudulent Assets in Retirement Accounts 

Source Complaint descriptiona

Securities and 

Exchange 

Commission

Account owner received periodic account statements from his 

custodian showing a large balance related to his investment. The 

account owner later discovered that the investment was part of an 

alleged Ponzi scheme and had never had intrinsic value.

Securities and 

Exchange 

Commission

Account owner relied on and did not verify the fair market value the 

custodian received from the company issuing the asset and reported to 

the Internal Revenue Service. The company was allegedly involved in a 

Ponzi scheme. 

Securities and 

Exchange 

Commission

Account owner believed custodian should have made him aware of 

problems with an unpaid promissory note because many of custodian’s 

other clients were also affected by same issuer.

Source: GAO analysis of complaint data. | GAO-17-102

a

We did not confirm the authenticity of these complaints or investigate any of the allegations made. In 

addition, we did not collect information about all of their resolutions.

Account owners may also face challenges when trying to liquidate certain 

unconventional assets to distribute as retirement income. Unlike publicly 

traded assets, which can be purchased and sold with relative ease in 

retirement accounts, account owners may experience difficulty finding a 

secondary market in which to sell certain unconventional assets. For 

example, account owners trying to liquidate a private equity investment 

must find other investors willing to purchase the asset. (See table 11.)

Some Unconventional 

Assets Are Difficult to 

Distribute as Retirement 

Income
Page 33 GAO-17-102 Unconventional Assets

Table 11: Examples of Retirement Account Owner Challenges Associated with 

Liquidating Unconventional Assets

Source Complaint descriptiona

Securities and 

Exchange 

Commission

Account owner was unable to locate an investor to purchase her 

$40,000 limited partnership interest in a new housing development. 

Better Business 

Bureau

Account owner who was the beneficiary to her late husband’s 

account tried unsuccessfully to obtain retirement income from the 

account on multiple occasions because the investment sponsor did 

not offer liquidation opportunities. 

Better Business 

Bureau

Account owner could not distribute and close his IRA invested in an 

illiquid receivership claim. His only option for selling his investment 

was to find a third party to purchase the receivership claim.

Source: GAO analysis of complaint data. | GAO-17-102

a

We did not confirm the authenticity of these complaints or investigate any of the allegations made. In 

addition, we did not collect information about all of their resolutions.

Account owners who have difficulty liquidating unconventional assets may 

instead be required to accept in-kind distributions rather than cash to 

comply with the minimum distribution requirements.43 For example, an 

account owner invested in real estate may need to request that a 

custodian distribute a percentage of the property equivalent to their 

calculated annual RMD. In such a case, that individual would own an 

illiquid portion of the property personally while the account would own the 

rest. The account owner in this scenario would not be able to receive a 

cash distribution to use as retirement income, yet would be responsible 

for paying applicable income taxes on the in-kind distribution.

Current IRS guidance provides little information to help IRA owners 

understand their expanded responsibilities and potential challenges 

associated with investing in unconventional assets. For example, in our 

review of complaint data, some account owners appeared to 

misunderstand their responsibilities documented in the custodial 

agreements, and expected their custodian to provide due diligence, 

monitor investments, or compensate them for investment losses. (See 

table 12.)

 43Account owners may also choose to direct the custodian to distribute IRA assets in-kind 

when their account has enough liquidity to make the RMD.

IRS Provides Limited 

Guidance to Account 

Owners Who Invest Their 

Retirement Savings in 

Unconventional Assets
Page 34 GAO-17-102 Unconventional Assets

Table 12: Examples of Retirement Account Owners Misunderstanding Their 

Responsibilities to Monitor Investments

Source Complaint descriptiona

Securities and 

Exchange 

Commission

Account owner lost contact with company in which he had invested 

$46,000 in private stock. Unable to retrieve his investment from the 

company, the account owner expected the custodian return the full 

amount of the investment. 

Securities and 

Exchange 

Commission

Account owner expressed concern when company from which he 

purchased private stock stopped providing updated valuations. He 

demanded his custodian transfer his original investment amount 

back to his previous custodian. 

Securities and 

Exchange 

Commission

Account owner discovered 7 years after his original $51,000 

investment in private stock that the stock had lost value. The 

account owner had expected the custodian to monitor the 

investment.

Source: GAO analysis of complaint data. | GAO-17-102

a

We did not confirm the authenticity of these complaints or investigate any of the allegations made. In 

addition, we did not collect information about all of their resolutions.

Federal internal control standards require agencies to communicate 

effectively with external stakeholders to help achieve agency goals.44

IRS’s Taxpayer Bill of Rights states that taxpayers have the right to know 

what they need to do to comply with the tax laws, and are entitled to clear 

explanations of the laws and IRS procedures in all tax forms, instructions, 

publications, notices, and correspondence.45 In addition, IRS’s strategic 

plan states that IRS guidance should help taxpayers understand their tax 

responsibilities through targeted outreach, communications, and 

education.46 We previously recommended that IRS outreach and 

education explicitly target the risk of noncompliance for IRA owners 

investing in unconventional assets.47

We found three areas, in particular, where IRS guidance lacks specific 

information for account owners investing in unconventional assets:

 44See GAO, Standards for Internal Control in the Federal Government, GAO-14-704G

(Washington, D.C.: September 2014).

45This document is available for download at https://www.irs.gov/taxpayer-bill-ofrights#informed.

46IRS Strategic Plan, Fiscal Years 2014-2017, Objective 2: Develop clear and focused 

outreach, communications, and education programs to assist taxpayer understanding of 

tax responsibilities and awareness of emerging tax laws.

47GAO-15-16.
Page 35 GAO-17-102 Unconventional Assets

• Prohibited transactions. IRS officials said that engaging in prohibited 

transactions is the most prominent compliance risk associated with 

investing IRA savings in unconventional assets, but IRS has not yet 

compiled data to help provide targeted outreach to IRA owners who 

invest in unconventional assets.

48 In 2014, we recommended that 

IRS: (1) add an explicit caution in Publication 590 for taxpayers about 

the potential risk of engaging in a prohibited transaction when 

investing in unconventional assets; and (2) identify options to provide 

targeted outreach to taxpayers with unconventional IRA assets and 

their custodians to help them avoid losing their IRA tax-favored status 

by engaging in a prohibited transaction. In 2015, IRS added an explicit 

caution to IRA owners in Publications 590-A and 590-B about the 

heightened risk of engaging in a prohibited transaction, but has not 

compiled the data to help provide targeted outreach.49 IRS said it 

could refine its outreach to those taxpayers with nonpublic IRA assets 

using the new asset type data once compiled electronically. Unless 

IRS augments outreach based on reliable data about unconventional 

IRA investments, these taxpayers at greater risk may not be able to 

ensure compliance with rules on prohibited transactions. Four service 

providers told us that additional guidance would help IRA owners 

investing in unconventional assets understand the risks for prohibited 

transactions.

• Unrelated business taxable income. IRA owners unfamiliar with 

monitoring their investments for UBTI have limited guidance to assist 

them in identifying and calculating their tax liability. IRS Publications 

590-A and 590-B, which together serve as a general IRA handbook 

for IRA owners, make no mention of UBTI or its tax consequences for 

IRAs. IRS Publication 598 -Tax on Unrelated Business Income of 

Exempt Organizations lists IRAs as one of many exempt entities 

subject to UBTI, and provides detailed examples of how to calculate 

 48As of November 2016, IRS plans to electronically compile the IRA asset type data for 

tax year 2016 that will be filed in 2017, but IRS has not yet provided a date on when the 

new data will be available for further analysis.

49In June 2016, IRS outlined new information to be reported for nonmarketable IRA assets 

and included a general caution that IRAs with nonmarketable investments or assets under 

direct taxpayer control may be subject to a heightened risk of committing prohibited 

transactions. This caution—similar to those that IRS added to its publications about IRA 

contributions and distributions—is a step toward helping taxpayers better understand 

which investments pose greater risks. Publication 590-A, Contributions to Individual 

Retirement Arrangements (IRAs), Department of Treasury, Internal Revenue Service and 

Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), 

Department of Treasury, Internal Revenue Service. 
Page 36 GAO-17-102 Unconventional Assets

UBTI and file tax forms. However, the publication does not provide 

specific examples of how IRA investments in unconventional assets 

can generate UBTI. An IRS official said that the IRAs subject to UBTI 

represented a small percentage of 990-T filers, and that neither the 

frequency nor consequences of noncompliance met the threshold for 

including specific IRA-related content in the IRA and UBTI guidance. 

However, without an explicit caution or guidance from IRS, account 

owners may inadvertently invest in assets that require additional 

monitoring and filing obligations; failure to meet these obligations may 

subject account owners to underpayment penalties.

• Fair market value. Current IRS guidance includes no guidance or 

advice to custodians or IRA owners regarding how to determine the 

FMV for unconventional assets held in retirement plans. An IRS 

official stated that FMV is a commonly understood term and that many 

professional appraisal companies could provide an unbiased value for 

any IRA asset. However, 9 of the 17 custodians reported challenges 

obtaining FMV information, such as from nonresponsive account 

owners or investment sponsors, or in obtaining adequate supporting 

documentation. Further, securities administrators in one state said 

that guidance could be improved to indicate to custodians the type of 

information that they should rely on for substantiating FMV. In 

addition, three service providers said that account owners needed 

clearer guidance on FMV reporting, such as the types of information 

that would fulfill the requirements.

The inclusion of language from the IRS model form that a custodial 

agreement has been “pre-approved by the IRS” and the ability for 

custodians to amend the IRS model form may mislead account owners 

into thinking that IRS has reviewed and approved the entirety of the 

document they sign.50 Fifteen of the 20 custodial agreements we 

reviewed retained language from the IRS model form stating that the 

agreement had been “pre-approved by the IRS,” but an IRS official said 

that the agency does not receive, review, or approve custodial 

agreements. In fact, the model form instructs IRA owners and custodians 

not to file the form with IRS.51 In addition, 16 of the agreements 

resembled an IRS form, which may further lead account owners to 

 50See appendix II for excerpts of language included in Form 5305-A. 

51An IRS official told us that substantial resources would be needed to review the 

thousands of IRA documents offered to the public that were generally similar. By not 

requiring parties to file the form, financial and administrative costs were reduced, 

benefitting IRS and taxpayers.

Custodial Agreements That 

Follow the Model Form May Be 

Confusing
Page 37 GAO-17-102 Unconventional Assets

believe that the provisions contained within the form had been verified by 

IRS. For example, these agreements included the IRS form number, an 

IRC section reference, and the IRS 2002 revision date for the model form 

at the top of the first page. Lastly, we found that all 20 of the custodians 

amended the form to include multiple provisions designed to protect the 

custodian.52 For example, some of these added provisions include:

• performing no due diligence on the investment and the investment 

sponsor;

• indemnifying the custodian of responsibility for sharing known 

information on troubled assets with account owners;

• reserving the right to liquidate IRA assets of the custodian’s choosing; 

and

• employing and paying agents, attorneys, and accountants with IRA 

funds for any purpose deemed necessary.

The amended form may cause confusion on the part of IRA owners. For 

example, IRA owners may not be able to differentiate between the model 

IRS language and terms and conditions added by custodians. IRA owners 

may also read the “pre-approved by the IRS” statement and assume that 

the IRS has vetted the provisions added by custodians.53

With few restrictions on the types of assets that can be held in an IRA or 

a solo 401(k) plan, individuals can invest their retirement savings in an 

increasingly diverse range of unconventional assets—some of which may 

not have been imagined as retirement plan assets when the first IRAs or 

solo 401(k) plans came on the market. Unconventional assets, such as 

virtual currency and unsecured promissory notes, when placed in 

retirement accounts introduce different kinds of risk to account owners, 

and can have potential federal tax implications. These risks are 

particularly high for older workers nearing retirement who transfer savings 

accumulated over the course of their careers to establish new retirement 

 52The 20 custodial agreements we reviewed that used the IRS model form ranged from 2 

to 16 pages in length.

53IRS addressed a similar issue in the past. For example, in 2009 IRS issued a publication 

alerting IRA owners about questionable advertisements and solicitations for “IRS 

Approved” or “IRA Approved” investments. IRS, An Important Message for Taxpayers with 

IRAs: The IRS Does Not Approve IRA Investments, Publication 3125 (10-2009), Catalog 

Number 26091B (2009).

Conclusions
Page 38 GAO-17-102 Unconventional Assets

accounts that allow investments in certain assets that they may not fully 

understand and may expand their responsibilities. IRS has published 

detailed guidance to assist account owners with directing their retirement 

investments, but this guidance has not kept pace with changes in 

investment options. As a result, account owners who take on 

responsibility for accounts invested in unconventional assets must rely on 

guidance better suited for investments in more conventional assets—

publicly traded stocks, bonds, and mutual funds—which are often 

professionally managed. As account owners consider investing in 

unconventional assets, they should have a clear understanding of what is 

required to manage such investments in a retirement account, ensure 

proper valuation and tax reporting, and navigate a complex set of rules 

that govern tax-favored retirement investments. The consequences for 

account owners who make a mistake can be severe and jeopardize a 

lifetime of retirement savings.

To assist IRA owners in addressing challenges associated with investing 

their retirement savings in unconventional assets, we recommend that the 

Commissioner of Internal Revenue take the following three actions:

• Provide guidance to IRA owners on the potential for IRA transactions 

involving certain unconventional assets to generate unrelated 

business taxable income subject to taxation in the current tax year 

and subsequent years. For example, IRS could consider adding an 

explicit caution in Publication 590 Individual Retirement Arrangements 

(IRAs) and include a link in Publication 590 to Publication 598 Tax on 

Unrelated Business Income of Exempt Organizations to provide 

examples demonstrating how certain unconventional assets in IRAs 

can generate unrelated business income tax for account owners.

• Provide guidance to IRA owners and custodians on how to determine 

and document fair market value (FMV) for certain categories of hardto-value unconventional assets. For example, IRS could consider 

updating Form 5498 instructions to custodians on how to document 

FMV for hard-to-value assets (e.g., last-known FMV based on 

independent appraisal, acquisition price) and provide guidance 

directed at account owners that provides examples of how to 

ascertain FMV for different types of unconventional assets.

• Clarify the content of the model custodial agreement to distinguish 

what has been reviewed and approved by IRS and what has not. For 

example, IRS could consider: (1) restricting custodians from stating 

that the form has been “preapproved by the IRS” on the form; (2) 

Recommendations for 

Executive Action
Page 39 GAO-17-102 Unconventional Assets

adding language to specify which articles have been preapproved by 

the IRS and which have not; and (3) limiting custodians from adding 

provisions to the model form other than those preapproved by the 

IRS.

We provided a draft of this report to the Commissioner of Internal 

Revenue, the Secretary of the Treasury, the Secretary of Labor, the 

Chairman of the Securities and Exchange Commission, and the 

Chairman of the Federal Deposit Insurance Corporation for comment. In 

its written comments, reproduced in appendix III, IRS generally concurred 

with our findings and recommendations. In addition, each agency 

provided technical comments, which we incorporated as appropriate.

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Internal Revenue 

Service, the Department of the Treasury, the Department of Labor, the 

Securities and Exchange Commission, the Federal Deposit Insurance 

Corporation, and other interested parties. In addition, the report will be 

available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact 

Charles A. Jeszeck at (202) 512-7215 or James R. McTigue, Jr. at (202) 

512-9110. You may also reach us by e-mail at jeszeckc@gao.gov or 

mctiguej@gao.gov. Contact points for our Offices of Congressional 

Agency Comments 

and Our Evaluation
Page 40 GAO-17-102 Unconventional Assets

Relations and Public Affairs may be found on the last page of this report. 

GAO staff who contributed to this report are listed in appendix IV.

Sincerely yours,

Charles A. Jeszeck

Director, Education, Workforce,

and Income Security

James R. McTigue, Jr.

Director, Tax Issues

Strategic Issues
Appendix I: Objectives, Scope, and 

Methodology

Page 41 GAO-17-102 Unconventional Assets

The objectives for this study were to determine: (1) what is known about 

the prevalence of retirement accounts that invest in unconventional 

assets; (2) how these accounts are managed, and; (3) what challenges, if 

any, are associated with the administration of these types of retirement 

accounts.

Each of the engagement’s three researchable objectives required us to 

identify various arrangements for investing individual retirement account 

(IRA) and 401(k) plan savings in unconventional assets. For all 

objectives, we reviewed pertinent federal laws, regulations, and guidance 

on the use of retirement account savings, as well as recent federal and 

state enforcement actions against entities involved with these types of 

retirement accounts. In addition, we searched for relevant scholarly and 

peer reviewed materials, trade and industry articles, government reports, 

conferences papers, research publications, and working papers. We also 

interviewed a range of federal and state regulators, industry stakeholders, 

and participant advocates.

To determine the prevalence of retirement accounts that invest in 

unconventional assets and better understand how these accounts are 

managed, we conducted multiple structured data collection efforts from 

custodians and service providers that allow investment in unconventional 

assets. To identify challenges associated with administering retirement 

accounts that invest in unconventional accounts, we analyzed investor 

complaint data from three federal agencies and two independent 

organizations. We also used the multiple structured data collection efforts 

from custodians and service providers to obtain their perspectives on 

potential challenges for account owners and providers. In addition, we 

reviewed publicly available custodian and service provider 

documentation, including application forms, fee disclosures, and custodial 

trust account agreements, which are used to establish a traditional IRA 

and specify account owners’ roles and responsibilities. All data collected 

through these methods are nongeneralizable and do not necessarily 

reflect the experience of the entire population of custodians and service 

providers that hold retirement accounts invested in unconventional 

assets, and account owners who invest in unconventional assets. 

However, we believe the insights gained through these methods 

produced valuable information to better understand the extent and form of 

retirement account investment in unconventional assets.

Appendix I: Objectives, Scope, and 

Methodology

Overall Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 42 GAO-17-102 Unconventional Assets

To identify custodians and service providers of retirement accounts who 

allow retirement account owners to invest in unconventional assets, we 

conducted a literature search, reviewed industry websites, interviewed 

industry stakeholders, and reviewed the Internal Revenue Service’s (IRS) 

list of nonbank custodians. Through this process we identified 26 

custodians and 48 service providers with experience working with 

account owners in establishing and managing such accounts.1 We 

determined that these data were sufficiently reliable for the purpose of 

this report.

Next, to learn about the approximate number and value as well as types 

of retirement accounts held under custody at the end of calendar year 

2015, we conducted a survey data collection effort from the 26 custodians 

that we had identified from available sources. We obtained responses 

from 17 custodians who varied in terms of the number and value of 

accounts they held, and the types of unconventional assets they allowed. 

We focused our effort on custodians as they are responsible under the 

Internal Revenue Code (IRC) for reporting the fair market value of all 

IRAs under custody to IRS. This removed the potential for double 

counting accounts and assets reported by both a service provider and the 

custodian they use to house clients’ account assets. Through this effort, 

we also collected information on the types of unconventional assets 

account owners most commonly invest in. We confirmed the accuracy of 

account and asset data reported by 10 custodians who agreed to 

participate in a second structured data collection effort.

To examine how these retirement accounts are managed and get a sense 

of the challenges they present to account owners and providers, we 

conducted additional structured data collection efforts. We developed a 

follow-up set of questions for the same 17 custodians and received 

responses from 10 of them. We also developed a similar set of questions 

for the 48 service providers we identified who provide administrative 

support for IRAs and solo 401(k) plans, collecting information from 21 of 

 1

We collected data from a range of custodians and service providers. We identified 

custodians that were federally or state-chartered banks. These custodians varied in terms 

of value and type of assets they held. We also looked at nonbank custodians approved by 

the IRS, but none met our search criteria. The other service providers that we identified 

included account recordkeepers, facilitators of special transactions, attorneys, and 

accountants. 

Structured Data Collection 

Efforts
Appendix I: Objectives, Scope, and 

Methodology

Page 43 GAO-17-102 Unconventional Assets

them.2 Through these efforts, we collected information on the steps 

needed to establish a retirement account for the purpose of investing in 

unconventional assets, as well as the roles and responsibilities of various 

stakeholders in managing and administering accounts. We also collected 

providers’ perspectives on the reasons why some account owners choose 

to invest IRA and 401(k) plan savings in these types of assets and the 

challenges to account owners and providers may face in doing so. We 

determined that these data were sufficiently reliable for the purpose of 

this report.

To augment our understanding of challenges associated with managing 

retirement accounts invested in unconventional assets, we analyzed 334 

investor complaints obtained from three federal entities—the Department 

of Labor (DOL), the Office of the Comptroller of Currency (OCC), and the 

Securities and Exchange Commission (SEC)—and two independent 

organizations—the Financial Industry Regulatory Authority (FINRA) and 

the Better Business Bureau.3 Our list of custodians and service providers 

was used to query databases for relevant complaints. We analyzed the 

complaints to develop general categories of challenges. We then 

conducted a two-step review and arbitration process to ensure proper 

categorization of each of the 211 complaints that we determined were 

directly associated with retirement accounts invested in unconventional 

assets based on available information. We did not confirm the authenticity 

of these complaints or investigate any of the allegations made. In 

addition, we did not collect information about all of their resolutions. We 

determined that the data we collected were sufficiently reliable for the 

purposes of this report.

To assess the clarity of information new IRA owners receive about their 

roles and responsibilities from custodians who allow investment in

 2

We also developed questions to obtain data and information from eight service providers 

we identified who help account owners roll over existing retirement savings into a 401(k) 

plan that then funds a business the account owner starts or acquires. Though we collected 

information from four of the eight providers, including data on the approximate number of 

rollovers they facilitated in calendar year 2015, we determined that these data were not 

directly comparable to the assets held by custodians and not sufficiently reliable to include 

in this report.

3

IRS officials told us that the IRS systems’ configurations would not allow them to locate 

complaints on a specific topic.

Analysis of Investor 

Complaint Data

Review of Custodial 

Agreements
Appendix I: Objectives, Scope, and 

Methodology

Page 44 GAO-17-102 Unconventional Assets

unconventional assets, we collected and reviewed 20 publicly available 

custodians’ individual retirement custodial account agreements, which 

IRS requires custodians and account owners to complete to establish a 

traditional IRA. We analyzed the content of these agreements and 

compared their format with the format of the IRS model Form 5305-A.4

 4

IRS stipulates that custodians and account owners may only incorporate additional 

provisions if they comply with state and federal requirements. However, IRS does not 

systematically review completed custodial agreements, as custodians and account owners 

are required only to keep records of completed agreements, not file them with IRS.
Appendix II: Excerpts of Language Included in 

IRS Model Form 5305-A

Page 45 GAO-17-102 Unconventional Assets

Figure 4: Excerpts of Language Included in IRS Model Form 5305-A

Appendix II: Excerpts of Language Included 

in IRS Model Form 5305-A
Appendix III: Comments from the Internal 

Revenue Service

Page 46 GAO-17-102 Unconventional Assets

Appendix III: Comments from the Internal 

Revenue Service
Appendix III: Comments from the Internal 

Revenue Service

Page 47 GAO-17-102 Unconventional Assets
Appendix III: Comments from the Internal 

Revenue Service

Page 48 GAO-17-102 Unconventional Assets
Appendix III: Comments from the Internal 

Revenue Service

Page 49 GAO-17-102 Unconventional Assets
Appendix IV: GAO Contacts and Staff 

Acknowledgments

Page 50 GAO-17-102 Unconventional Assets

Charles A. Jeszeck, Director, Education, Workforce, and Income Security 

Issues, (202) 512-7215 or jeszeckc@gao.gov

James R. McTigue, Jr., Director, Tax Issues, Strategic Issues, (202) 512-

9110 or mctiguej@gao.gov

In addition to the contacts named above Christopher Falcone, Emily 

Gruenwald, David Lehrer, Jonathan S. McMurray, Jessica Moscovitch, 

Thomas Moscovitch, and MaryLynn Sergent made key contributions to 

this report. James Bennett, Amy Bowser, Caitlin Croake, Sheila McCoy, 

Jean McSween, Jessica Orr, Walter Vance, Kathleen Van Gelder, and 

Adam Wendel also provided support.

Appendix IV: GAO Contacts and Staff 

Acknowledgments

GAO Contacts

Staff 

Acknowledgments

(100271)
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