When you take your IRA out of the United States and invest it into an offshore IRA LLC, you become the custodian for the account. In this capacity, you’re responsible for following all US IRA rules. Here are the basic IRA rules and prohibited transactions you must watch out for when you operate an offshore IRA LLC.
First, a few comments on the process of taking your IRA offshore. This will give you some background on why these rules apply.
You can move any vested IRA or 401-K out of the United States. Likewise, if you can convert a defined benefit plan into an IRA, you can move that offshore.
The first step in this process is forming an offshore IRA LLC in a zero tax max privacy asset protection country. Most popular are Nevis, Belize, Cook Islands and Seychelles. These are the top asset protection jurisdictions with single member LLC statutes.
With the LLC up and running, we open an offshore bank account in the name of the LLC and your US custodian transfers your cash into that account. You’re the signer on the account and in control of all investments and transactions. Your custodian has no access to the offshore bank account and does not get involved in your investment decisions.
For more on this process, see: Here’s how to take your IRA offshore in 6 steps
As the manager of the LLC, and the person responsible for making investment decisions for the IRA, you’re in total control. You’re basically the investment advisor to the IRA and, as such, must always act in the best interest of the account. That is to say, you’re jobs are to 1) increase the value of the account and 2) protect the account. You are not allowed not to personally benefit from this position.
The two main risk areas for an IRA investment advisor are 1) prohibited transactions and 2) prohibited investments.
Failure to follow these rules can result in your IRA being dissolved and major taxes and penalties being applied. Per the IRS website, “…if an IRA owner or his or her beneficiaries engage in a prohibited transaction in connection with an IRA account at any time during the year, the account stops being an IRA as of the first day of that year. The effect of this is the account is treated as distributing all its assets to the IRA owner at their fair market values on the first day of the year. If the total of those values is more than the basis in the IRA, the IRA owner will have a taxable gain that is includible in his or her income.”
Prohibited Transactions in an Offshore IRA LLC
Generally, a prohibited transaction in an IRA is any improper use of an IRA account by the owner, investment advisor, his or her beneficiary, or any disqualified person. Disqualified persons include you and your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).
The following are examples of prohibited transactions with an IRA.
- Borrowing money from it
- Selling property to it
- Using it as security for a loan
- Buying property for personal use (present or future) with IRA funds
Prohibited Investments in an Offshore IRA LLC
Your offshore IRA LLC is not allowed to invest in life insurance or collectibles. If you get caught buying prohibited investments, the amount invested is considered distributed in the year invested and you may have to pay a 10% additional tax on early distributions.
Here are some examples of collectibles:
- Metals – with exceptions for certain kinds of bullion,
- Coins – (but there are exceptions for certain coins),
- Alcoholic beverages, and
- Certain other tangible personal property.
For more on gold, see: IRA Gold Rules
The logic behind prohibited investments is similar to that of prohibited transactions. You could buy artwork, rugs, or antiques and display them in your home. You would then be getting a personal benefit from those investments.
I hope you’ve found this article on the basic IRA rules and prohibited transactions you must watch out for when you operate an offshore IRA LLC to be helpful. For assistance in taking your IRA offshore, you can reach me at email@example.com or (619) 550-2743. All consultations are free and confidential.