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Roth Conversion With Illiquid IRA Assets: 2026 Year-End Guide

By Jorge··25 min read

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Quick Answer

A Roth conversion is taxed in the year the money leaves the traditional IRA, so for 2026 it has to leave by December 31, 2026, and for an IRA that holds a non-traded REIT, BDC, interval fund or private note the tax is on the value of what you move, not on what you could sell it for. 26 U.S.C. 408A(d)(3)(A)(i) includes in gross income “any amount which would be includible were it not part of a qualified rollover contribution”, and 26 CFR 1.408A-4 A-7(a) assigns it to “the taxable year in which the amount is distributed or transferred from the traditional IRA”. There is no undo: 26 U.S.C. 408A(d)(6)(B)(iii) bars recharacterizing a conversion. No rule we found says how to value non-traded shares for a conversion; the GAO wrote in 2020 that IRS publications “do not provide information about how to accurately determine the FMV of hard-to-value unconventional assets”. So the number is the one your custodian holds. As of October 15, 2026: KBS REIT III's latest estimate is $2.70 a share (approved December 18, 2025), down 30.6% from $3.89 (our arithmetic); BREIT's Class I NAV was $14.1339 on December 31, 2025; BCRED's was $24.79. Worked example (our arithmetic): converting 50,000 KBS shares at $2.70 adds $31,172 of 2026 federal tax for a joint filer with $150,000 of other taxable income, which should be paid from outside the IRA.

Key Takeaways

  • There is no income limit on converting. The old $100,000 adjusted gross income test in section 408A(c)(3)(B) was struck out by Pub. L. 109-222 section 512(a)(1), for taxable years beginning after December 31, 2009, although 26 CFR 1.408A-4 A-2(a) still prints it. The 2026 Roth IRA phase-outs in Publication 590-A ($242,000 to $252,000 joint; $153,000 to $168,000 single) govern contributions, not conversions (our reading).
  • The taxable amount is what is distributed, valued at fair market value for property. The only valuation rule in the conversion regulation (A-14) is for annuity contracts. For the rest, the Form 1099-R instructions say to report property at “the FMV of the securities or other property on the date of distribution”, and a distribution of assets with no readily available value gets code K. The custodian's Form 5498 box 5 value for December 31, 2026 is separate, and it is the one that sets the pro-rata fraction.
  • Since 2018 a conversion cannot be recharacterized (26 U.S.C. 408A(d)(6)(B)(iii), added by Pub. L. 115-97 section 13611(a)). KBS REIT III's estimate fell from $3.89 (December 12, 2024) to $2.70 (December 18, 2025); on 50,000 shares converted at the higher value a joint filer in our example would have paid $14,280 more federal tax than at the lower one, on $59,500 of value that was gone a year later (our arithmetic).
  • Pay the tax from outside the IRA. Tax withheld from the IRA is a distribution that is not converted: it is taxable itself and, if you are under 59 1/2, may carry the 10% additional tax (Publication 590-A). In our example $31,172 withheld would add $7,481.28 of tax at 24% and $3,117.20 at 10% (our arithmetic). An IRA that is entirely one illiquid fund also has no cash to withhold (our reading).
  • The value a custodian can use depends on the vehicle's clock. KBS REIT III sets one estimate a year (December 12, 2024; December 18, 2025; the 10-K expects the next “no later than December 2026”). BREIT publishes a monthly NAV and prices repurchases at the prior month's. BCRED reported its December 31, 2025 NAV of $24.79 in an 8-K dated January 22, 2026, 22 days after year end (our arithmetic).
  • A traditional IRA is one contract for the pro-rata rule (26 U.S.C. 408(d)(2)(A)), so you cannot pick which dollars to convert. In our example, $40,000 of basis against $265,000 in another IRA and a $135,000 conversion makes 10% nontaxable and $121,500 taxable (our arithmetic). Each conversion also starts its own 5-year clock for the 10% additional tax on early withdrawals (Publication 590-B).

CSV · 92 rows

Roth conversion rules for IRAs holding illiquid assets, 2026 tax numbers and vehicle valuation record

92 rows: Code and regulation rules with citations, IRS form and publication instructions, the 2026 married-filing-jointly brackets and estimated-tax dates, KBS REIT III estimated values per share, BREIT and BCRED monthly NAVs with their filing accessions, and a worked example (our arithmetic).

What the Code and the regulation say about a conversion

Everything below applies to the conversion of a traditional IRA, including a SEP IRA (26 CFR 1.408A-4 A-4), and nothing in it turns on whether the assets can be sold (our reading). The asset's liquidity enters only through the value you have to report and the cash you need for the tax.

RuleWhat it saysCitation
Tax on the conversionThe converted amount is included in gross income as a distribution, “any amount which would be includible were it not part of a qualified rollover contribution”26 U.S.C. 408A(d)(3)(A)(i), (C)
Which year“the taxable year in which the amount is distributed or transferred from the traditional IRA”26 CFR 1.408A-4 A-7(a)
10% additional tax on the conversion itselfSection 72(t) “shall not apply” to the conversion, but a separate 5-year period applies to each conversion if you later withdraw it26 U.S.C. 408A(d)(3)(A)(ii); IRS Pub. 590-B (2025)
Ways to convertRollover within 60 days, trustee-to-trustee transfer, or a transfer or redesignation at the same trustee26 CFR 1.408A-4 A-1(b)
Same property“You must roll over into the Roth IRA the same property you received from the traditional IRA.”IRS Pub. 590-A (2025); 26 CFR 1.408-4(b)(1)
UndoSubparagraph (A), the recharacterization rule, does not apply to a conversion26 U.S.C. 408A(d)(6)(B)(iii)
Income limitNone for conversions: the former $100,000 test was struck out for taxable years beginning after December 31, 2009Pub. L. 109-222 sections 512(a)(1), (c); 26 U.S.C. 408A(c)(3)
Required minimum distributionThe first dollars distributed in a year are treated as the RMD, and an RMD cannot be converted26 CFR 1.408A-4 A-6; IRS Pub. 590-A (2025)
Other income effectsThe taxable conversion amount counts for the taxable part of Social Security benefits under section 8626 CFR 1.408A-4 A-9
Pro-rata ruleAll traditional IRAs are treated as 1 contract and all distributions in a year as 1 distribution26 U.S.C. 408(d)(2)(A), (B)

Source: 26 U.S.C. 408 and 408A (Cornell Legal Information Institute, read October 15, 2026); 26 CFR 1.408A-4 and 1.408-4 (eCFR, current to October 6, 2026); IRS Publications 590-A and 590-B (2025).

Two things the primary texts settle. First, the regulation's A-2(a) still reads “An individual with modified AGI in excess of $100,000 for a taxable year is not permitted to convert an amount to a Roth IRA”, but the statute it implemented lost that sentence in 2006 for years after 2009, so a high earner can convert (our reading of the statute's amendment notes). The 2026 Roth contribution limits in Publication 590-A start to phase out at $242,000 (married filing jointly) and $153,000 (single), and those apply to contributions. Second, the 2025 budget law (Public Law 119-21, the One, Big, Beautiful Bill Act) made the 10%, 12%, 22%, 24%, 32%, 35% and 37% rates permanent, according to Revenue Procedure 2025-32; there is no scheduled rate increase after 2025 to plan a conversion around.

Which value is taxed: the gap in the rules

For a brokerage IRA the value on the conversion date is a closing price. For a non-traded REIT share, a private note or an LLC interest, three IRS documents touch the question and none answers it.

  • The conversion regulation. The only fair-market-value rule in 26 CFR 1.408A-4 is A-14, and it is about “an individual retirement annuity” or an annuity contract held in an IRA. Nothing there values REIT shares or notes (our reading).
  • The reporting instructions. For a distribution of property, the Instructions for Forms 1099-R and 5498 (2026) tell the payer to include “the FMV of the securities or other property on the date of distribution”. For a traditional IRA distribution of “assets that do not have a readily available FMV” the payer enters code K, and the list includes non-traded stock, LLC or partnership interests and real estate. A conversion is reported in boxes 1 and 2a with “Taxable amount not determined” checked in box 2b and code 2 or 7 in box 7a.
  • The year-end value. Form 5498 box 5 is “the FMV of the account on December 31, 2026”, and the instructions add that “Trustees and custodians are responsible for ensuring that all IRA assets (including those not traded on established markets or not having a readily determinable market value) are valued annually at their FMV.” The participant statement is due February 1, 2027 and Form 5498 goes to the IRS by May 31, 2027, which is Memorial Day, so the instructions' own holiday rule makes it the next business day.

The GAO looked at this in 2020: for tax year 2016 about 2 million IRAs held hard-to-value assets, about 400,000 (about 20 percent) of the Forms 5498 reporting them lacked the FMV amount, and “Publications 590-A and 590-B and instructions for custodian forms do not provide information about how to accurately determine the FMV of hard-to-value unconventional assets” (GAO-20-210). We found no later IRS rule that fills the gap (our reading). In practice the conversion value is whatever the custodian and you can document, and the custodian's own December 31 valuation is the number the IRS will compare it with.

What three real vehicles file about their value

The same custodian could hold three very different numbers on December 31, 2026, depending on the vehicle. Each row below comes from the vehicle's latest annual report as of October 15, 2026.

Vehicle (filing)How the value is setLatest value on fileWhat it means for a December conversion
KBS REIT III, non-traded REIT (10-K, accession 0001482430-26-000014)One board-approved estimated value per share a year, with an independent appraiser; approved December 12, 2024 ($3.89) and December 18, 2025 ($2.70), each as of September 30$2.70 a share (approved December 18, 2025, as of September 30, 2025); redemption program terminated March 15, 2024A conversion before the next approval uses a value that is more than a year old; the 10-K expects the update “no later than December 2026”
Blackstone Real Estate Income Trust (BREIT), non-traded REIT (10-K, accession 0001662972-26-000032)Monthly NAV; repurchases at “the transaction price”, which “will generally be equal to our prior month's NAV per share”Class I $14.1339 at December 31, 2025 ($14.0148 at November 30, 2025)In mid-December the transaction price in effect is generally the November 30 NAV; shares can be sold only inside the 2% a month and 5% a quarter limits
Blackstone Private Credit Fund (BCRED), non-traded BDC (10-K, accession 0001803498-26-000014; 8-K, accession 0001803498-26-000003)Monthly NAV; independent valuation firms prepare quarter-end valuations of private investments; quarterly repurchases of up to 5% of NAV at the Board's discretion$24.79 at December 31, 2025 (reported in an 8-K dated January 22, 2026); $25.42 at January 31, 2025The December 31 NAV was reported on January 22; a custodian's December 31 statement may carry the prior month's NAV or the late one (our reading; ask which)

Source: SEC filings 0001482430-26-000014, 0001662972-26-000032, 0001803498-26-000014 and 0001803498-26-000003.

KBS REIT III shows the timing problem best. The 10-K says: “we will provide an estimated value per share for our common stock annually to those fiduciaries (including IRA trustees and custodians) who request it. We can make no claim whether such estimated value per share will or will not satisfy the applicable annual valuation requirements under ERISA and the Internal Revenue Code.” The $2.70 is a September 30, 2025 value, and the 10-K says the risks it describes “are not priced into the December 18, 2025 estimated value per share”. A 1% change in the appraised value of its properties moves the estimate by $0.11, which is about 4% of $2.70 (our arithmetic). Because the board approved the last two estimates on December 12 and December 18, a conversion booked on December 10, 2026 and one booked on December 22, 2026 could use different values for the same shares if the 2026 estimate follows the same pattern (our reading; the filing gives “no later than December 2026”).

BREIT's NAV shows how far a monthly value can move. Class I NAV was $14.8938 at August 31, 2023 and $13.7133 at December 31, 2024, a fall of 7.9% (our arithmetic), then $14.1339 at December 31, 2025. BREIT repurchased shares in the fourth quarter of 2025 at average prices of $13.86 (October), $13.91 (November) and $14.00 (December), which is the lag between NAV and price in numbers.

BCRED's December NAV arrived in January. The 8-K whose date of report is January 22, 2026 gives the NAV per share of each class as of December 31, 2025: $24.79 for Class I, S and D, after $25.42 at January 31, 2025, a fall of 2.5% (our arithmetic). Whether a custodian's December 31 statement uses that late NAV or the prior month's is a question for the custodian (not verified).

Worked example: 50,000 shares of a REIT whose estimate fell 30.6%

All figures are our arithmetic on an assumed taxpayer: married filing jointly, $150,000 of taxable income before the conversion, 50,000 KBS REIT III shares in the traditional IRA, and the 2026 brackets of Revenue Procedure 2025-32, where the tax is $11,600 plus 22% of the excess over $100,800 up to $211,400 and $35,932 plus 24% of the excess over $211,400 up to $403,550. The dollar values of the two conversions are real filed estimates; the taxpayer is not.

StepConvert at $2.70 (value on file from December 18, 2025)Convert at $3.89 (value on file from December 12, 2024)
Conversion amount (50,000 shares)$135,000$194,500
Taxable income after conversion$285,000$344,500
Federal tax on $150,000 alone$22,424$22,424
Federal tax after conversion$53,596$67,876
Added tax from the conversion$31,172 (23.1% of the amount)$45,452 (23.4% of the amount)
Value of the same shares at $2.70$135,000$135,000
Tax paid on value no longer there$0$14,280 ($45,452 less $31,172)

Federal income tax only; state tax, the standard deduction and other income are ignored. The 2026 brackets are applied to both columns for comparison.

The $3.89 column is the one a recharacterization used to fix. Before 2018, a conversion could be reversed by the return's due date for that year. Publication 590-A: “No recharacterizations of conversions made in 2018 or later.” and “If you made a conversion in the 2017 tax year, you had until the due date (including extensions) for filing the return for that tax year to recharacterize it.” Today the $14,280 is a fact of the filing, not an option.

Paying the tax: why it has to come from outside the IRA

Taking the $31,172 out of the IRA is possible and usually a poor idea. Publication 590-A says of the part of a withdrawal you do not roll into the Roth that it “will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10% additional tax on early distributions”.

Way to pay the $31,172 (our arithmetic)What it addsWhy
From a taxable account or bank account$0 of extra taxThe conversion stays $135,000
Withheld from the IRA$7,481.28 of tax at 24%, plus $3,117.20 (10%) if under 59 1/2The withheld amount is a distribution that is not converted, and it is taxed itself
Sell fund shares to raise itDepends on whether the fund repurchasesKBS REIT III terminated its redemption program on March 15, 2024; BREIT limits repurchases to 2% of NAV a month and 5% a quarter
Convert lessLower tax, lower conversionSize the conversion to the cash you hold outside the IRA, not to the IRA balance

Three dates frame the payment. The fourth estimated payment for 2026 is due January 15, 2027 (Publication 505). You can skip it by filing your 2026 return by February 1, 2027 and paying the balance; the Form 1040-ES says February 1, 2027 and Publication 505 says January 31, 2027, which is a Sunday. And a large December conversion can leave you short for estimated tax: Publication 505 says to expect to owe tax if you expect withholding and credits “to be less than the smaller of” 90% of the 2026 tax or 100% of the 2025 tax, and to substitute 110% for 100% if your 2025 adjusted gross income was more than $150,000 ($75,000 if married filing separately). In the annualized income installment method, Publication 505 counts “One-fourth of your estimated withholding” on each due date, unless you use the actual dates, and the Form 2210 instructions describe withholding treated “as having been withheld evenly throughout the year”. Whether extra wage withholding late in the year can cover a December conversion is a question for your CPA (our reading).

If the value drops after you convert, and the other clocks

There is no remedy in the Code for a fall after the conversion. Section 408A(d)(6)(B)(iii) keeps the recharacterization window shut for conversions, and the Form 1099-R and 5498 instructions repeat that conversions in the participant's tax years beginning after December 31, 2017 cannot be recharacterized. The conversion is a fact on Form 8606 Part II and Form 1099-R. Two clocks follow it:

  • The 5-year period for a qualified distribution. A Roth distribution is not qualified if made within the 5-taxable year period “beginning with the first taxable year for which the individual made a contribution to a Roth IRA” (26 U.S.C. 408A(d)(2)(B)), together with age 59 1/2, death, disability or a qualified special purpose distribution (408A(d)(2)(A)).
  • The 5-year period for the 10% additional tax. It starts “with the first day of your tax year in which you convert”, and “A separate 5-year period applies to each conversion and rollover” (Publication 590-B). A holder under 59 1/2 who converts in December 2026 starts the period on January 1, 2026 (our reading of the same text).

Once inside a Roth IRA the illiquid asset has one less problem: Publication 590-B says “You aren't required to take distributions from your Roth IRA at any age” while the owner is alive, so the required-minimum-distribution queue that our guide to RMDs with illiquid IRA assets describes no longer applies to it. That is a reason people convert, and it is separate from the tax cost you pay on the value of the shares at the conversion date.

The pro-rata rule when one IRA is the illiquid one

Section 408(d)(2)(A) treats “all individual retirement plans” as one contract, so you cannot convert one IRA and leave the basis behind. The Instructions for Form 8606 (2025) say line 6 is “the total value of all your traditional IRAs as of December 31, 2025, plus any outstanding rollovers”; for a 2026 conversion the same line uses December 31, 2026 (our reading, since the 2026 instructions are not out). The illiquid IRA therefore enters the fraction at whatever value the custodian reports for it on that date.

An example (our arithmetic, assumed figures): $40,000 of after-tax basis on Form 8606, $265,000 of value in other traditional IRAs at December 31, 2026, and the $135,000 KBS conversion. The nontaxable fraction is $40,000 / ($265,000 + $135,000) = 10%, so $13,500 is nontaxable and $121,500 is taxable. Nothing in the Code lets you aim the basis at a particular IRA. If you convert only the illiquid IRA and keep the cash IRA, the same fraction applies.

For an IRA that holds real estate or an LLC rather than a fund, our guide to self-directed IRA real estate rules covers the prohibited-transaction risks that apply before and after the move, and what to hold in a Roth IRA lists the platforms that offer Roth accounts.

What to ask your CPA and custodian before December 31, 2026

  • Custodian: what value will you report? Ask for the value of each illiquid asset on the conversion date in writing, which estimate or appraisal it comes from and its date. For KBS REIT III the filing says the estimated value is provided to custodians “who request it”.
  • Custodian: last day to receive a conversion. The tax year is the year the money is distributed or transferred; ask the cut-off for an in-kind transfer, which may be earlier than December 31, 2026 (not verified; custodian-specific).
  • Custodian: can the shares be re-registered? The regulation and Publication 590-A speak of the same property; ask whether the fund's transfer agent will move shares from the traditional IRA to your Roth IRA, or whether the custodian can redesignate the whole account.
  • Custodian: how will the 1099-R be coded? Code 2 or 7 for the conversion, and whether code K appears for assets with no readily available value; compare box 1 and 2a with your own figure.
  • CPA: where is the cash? Compare the added tax with the money you have outside the IRA, and whether wage withholding or the January 15, 2027 payment covers it.
  • CPA: does the added income move something else? Social Security is covered by 26 CFR 1.408A-4 A-9; whether it affects Medicare premiums or state tax: not verified here.
  • CPA: Form 8606. Do you have after-tax basis, and what is the December 31 value of all traditional IRAs including the illiquid one?
  • CPA: the 5-year clocks. Your age on the conversion date and the year of your first Roth contribution.
  • CPA and custodian: the RMD. If you are 73 or older, the 2026 RMD has to come out first (26 CFR 1.408A-4 A-6); our year-end calendar for non-traded REIT and BDC investors lists the other December 31, 2026 dates.

Verdict: what to settle before December

  • You hold the shares in a traditional IRA and have outside cash for the tax: the open questions are the value and the date, so get the custodian's written value and the fund's latest estimate in October, not on December 30.
  • Your outside cash is short: a smaller conversion is the only route that does not add tax or the 10% additional tax from the IRA (our reading of Publication 590-A); a fund with no repurchases, like KBS REIT III, cannot raise cash.
  • You are worried the estimate is high or will be cut: the 10-K's own sentence is that the estimate does not take “into account developments in our portfolio since December 18, 2025”; there is no way to reverse a conversion if the next one is lower.
  • You have after-tax basis in another IRA: run the Form 8606 fraction first.

What a holder can do with this

  • Pull the number. Ask your custodian for the December 31, 2025 Form 5498 value and the latest value for each illiquid asset, and compare it with the fund's own estimate or NAV on EDGAR (KBS REIT III, Blackstone Real Estate Income Trust and Blackstone Private Credit Fund are the three we read).
  • Price the conversion in two values. Do the arithmetic at today's value and at a 30% lower one, the size of KBS REIT III's last cut, and ask whether you would still convert.
  • Split the decision from the asset. If liquidity is the problem, what is an interval fund and the non-traded BDC list show how the repurchase terms of other vehicles differ.
  • Keep the paper. The custodian's valuation letter, the fund's estimate notice, the Form 1099-R and the Form 5498 are the file your CPA needs for Form 8606.

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Sources, read and saved on October 15, 2026: 26 U.S.C. 408 and 408A (Cornell Legal Information Institute); 26 CFR 1.408A-4 and 1.408-4 (eCFR, current to October 6, 2026); IRS Instructions for Form 8606 (2025), Instructions for Forms 1099-R and 5498 (2026), Publications 505 (March 31, 2026), 590-A (2025) and 590-B (2025), Form 1040-ES (2026), Form 2210 instructions (2025) and Revenue Procedure 2025-32; GAO-20-210 (January 2020); and SEC filings 0001482430-26-000014 and 0001482430-26-000026 (KBS Real Estate Investment Trust III), 0001662972-26-000032 (Blackstone Real Estate Income Trust) and 0001803498-26-000014 and 0001803498-26-000003 (Blackstone Private Credit Fund). The taxpayer in the worked example, the basis and the other-IRA balances are assumptions; all sums are our arithmetic. This is analysis of public documents, not investment, legal or tax advice.

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