Moving Your IRA Offshore with an Self Directed IRA LLC
Self Directed IRA LLC Techniques of the Super Wealthy Now Available to the Average Investor
Self Directed IRA LLCs and Offshore IRA LLC Structures Take a Page from Mitt Romney’s Playbook
The most valuable investment we Americans have is our retirement account. Unfortunately, the majority of these holdings have been sitting for years with brokers that pay them little mind while they’ve lost money or, if you’re lucky, been flat and just eaten alive by fees. You can take control of these assets with a self directed IRA LLC or offshore IRA LLC.
Ever wonder how the super-rich generate enormous profits and pay zero tax? They do it by making investments through tax exempt self directed IRAs and using the international techniques below to defer or eliminate U.S. tax.
Click here for a recent N.Y. Times piece on Mitt Romney’s IRA tax planning.
Until recently, these advanced techniques were only available to millionaires and billionaires willing to pay enormous legal and accounting fees to create and maintain their structures. In this article, I pull back the curtain and explain the model in simple English…much to the consternation of my lawyerly colleagues.
Introduction to the Self Directed IRA
While your IRA has been sitting in a limbo imposed by your broker, your investment options have been extremely limited. If you wanted to buy gold, invest in a business, diversify out of the dollar, buy a high return foreign CD like the ones available from Panamanian banks at 8.5%, or purchase international real estate, you were out of luck. You are offered only those sucker bets on your provider’s menu…presumably those that have the best commission and fee structure for your advisor, regardless of whether they fit your objectives.
You do have a choice in all of this. You can take control of your retirement account by creating a self directed IRA and moving that in to a U.S. or offshore Limited Liability Company, appointing yourself as the manager of that LLC, and then making just about any investment you see fit.
Retirement Account: From here on, I will use the terms retirement account or IRA to refer to the various tax exempt retirement accounts, including 401(k), SEP / SARSEP / SIMPLE, ROTH, Keogh, Solo 401(k) and 403(b). The only option not covered here is the defined benefit plan, which may or may not be eligible to go offshore.
Prior Employer: You can always convert an IRA from a prior employer in to a Self Directed IRA, but generally not from your current employer. If your nest egg with your current employer is under performing, you are probably out of luck. There are a number of exceptions to this, so check with your HR department before writing off the Offshore Self Directed IRA LLC.
The traditional IRA LLC or U.S. Self Directed IRA allows you to take control of your investments, eliminates 95% of IRA fees, and allows you access to opportunities otherwise not available to an average retirement account. Taking your IRA offshore opens up a whole world of investment products and tax savings tools that, until now, have been the exclusive purview of the super-rich.
With the Self Directed IRA LLC you manage your investments and choose any type of permissible asset, including gold, real estate, foreign currencies, CDs, etc. With checkbook control, you write the checks from your IRA account, which allows for an immediate response to opportunities and maximum flexibility. You choose and control the deals and decide which investments to make with no one looking over your shoulder.
Self Directed IRA LLC vs Self Directed IRA
If you search around on the web, you will find that there are many companies offering Self Directed IRAs, a few marketing Self Directed IRA LLCs, and one or two experienced in Offshore Self Directed IRA LLCs. You will discover little actionable information on the advanced offshore techniques described below (UBIT Blocker Corporations). The high-dollar law firms hold these close to the vest and offer them only to their preferred clients.
Before discussing advanced techniques, let’s consider the difference between a Self Directed IRA LLC and a Self Directed IRA. A Self Directed IRA (without an LLC) is where you place your IRA with a custodian and he agrees to take your suggestions and investment requests under advisement. He generally offers a wider range of options than a traditional broker, but will only invest in offerings that he understand and can review. With a Self Directed IRA, you direct your investment advisor, but you do not control the deals and can’t force your custodian to make an investment that he is not comfortable with.
For example, many advisers feel that OTC stocks, IPOs, mortgage notes, and/or U.S. rental real estate is too high risk for a retirement account and will deny requests to hold these assets. I have yet to meet a self directed adviser that will approve an offshore investment or foreign real estate transaction.
The reason for refusing to make international investments is simple: A U.S. investment adviser has some amount of liability if your investments go south. It is his responsibility to protect the retirement assets and he is not capable of performing the due diligence necessary to make an informed international investment. To put it crudely, he is not making enough money from your account to spend the time necessary to investigate that type of investment.
By contrast, a Self Directed IRA LLC’s custodian performs only two tasks:
1) U.S. tax reporting and
2) placing the IRA assets in your LLC. After the money reaches the LLC, the custodian is out of the picture, earns no per transaction or investment advisory fees, and need not be consulted before you make an investment. You are the manager of the LLC and have checkbook control. You alone make whatever investments you see fit. You alone take on the risk and do the research necessary to make an informed decision.
Most Self Directed IRA LLCs use U.S. LLCs and are suited for U.S. investments. These Self Directed IRA LLCs allow you to hold domestic commercial and residential real estate, online brokerage accounts, gold and silver coins, tax liens, etc. Onshore Self Directed IRA LLCs are the most common, but generally not recommended for foreign investment…though, there are some exceptions to this rule.
An Offshore Self Directed IRA LLC uses an offshore LLC, rather than a U.S. LLC, to hold the retirement account. This entity opens a bank and/or investment account abroad and the U.S. custodian transfers the money or stocks in to that account, thereby investing the IRA money in to your offshore IRA LLC.
The offshore IRA LLC now has complete control over the retirement account and can, for example, decide to invest in physical gold in Switzerland, a brokerage account in Andorra, and a rental condo in Panama.
Self Directed IRA LLC Rules
The bottom line is that the manager of an Offshore Self Directed IRA LLC (you) must follow all of the same rules as does the manager of a U.S. IRA LLC or a self directed investment adviser Remember that you are managing the investments for the benefit of the IRA and must always do what is best for the account…just like a professional investment adviser is expected to do.
The simple key to success is to avoid self-dealing. The other basic rules are as follows:
- You must have a U.S. licensed IRA custodian / trustee between you and the IRA.
- You can’t borrow from the plan.
- You can’t pledge your IRA as collateral for ANY purpose
- Debt must be through a non-recourse loan.
- Your custodian must provide an annual valuation of IRA, an annual report to IRS,
- and handle State filings as necessary.
- You must maintain adequate books and records to evidence your use of funds and investment returns.
- You are prohibited from investing in life insurance contracts and “collectables” such as rugs, works of art, stamps and coins.
- You may not lend to any disqualified persons, such as your immediate family or a business if you own more than 50% of the stock or are an officer, director or highly compensated employee of that entity.
Real Estate Basics – Buying My Dream Home with My Self Directed IRA
The number one question I get is on real estate. Can I purchase my dream home in Belize through my Self Directed IRA LLC? If you want to live in that property immediately, the answer is no. You can purchase rental real estate, but once you move in, or make use of it, the total value is deemed to be a distribution to you and taxable to you under the terms of your retirement account.
When you are considering a particular transaction, always remember the basic rule of no self-dealing. If you receive a benefit from a transaction (in this case, use of the property), you have a problem and a taxable event.
Of course, there are a number of ways you can plan ahead, which is a must if your IRA will invest in real estate. If you wish to purchase a rental property and live in it when you hit retirement age, keep the following in mind:
1) You have the option to distribute your IRA’s holdings a little bit at a time.
At age 59 ½, you can begin distributing 10% of the property from your IRA, each year. To make this work, ownership must be properly reflected on your title each year, so you will need to make a new filing each year. This will allow you to spread the tax burden from distributions over a 10-year period. Once the property is 100% in your name, you can move in without any tax consequence.
2) You can convert some or all of your IRA to a ROTH.
Yes, you’ll pay income tax on the amount you convert, but this may make sense if you plan to add to the account over the coming years.
3) You may elect to begin distributing shares of your property before retirement age by making a 72T election.
The 72T method (‘substantially equal payments’) enables you to avoid the penalty for early IRA withdrawals by making fixed distributions over time.
The 72T exception offers a choice of methods, which you can use to tailor the timeline of your distributions. This system is based on your life expectancy (or, if you elect, on the joint life expectancy of you and your beneficiary), and whichever method you choose must be continued for at least 5 years or until reaching age 59 1/2.
Real Estate Basics – Using Leverage to Buy Real Estate
The second most common question I get, also related to real estate is: Can I borrow money to leverage up my Self Directed IRA LLC and purchase real estate? The answer is yes, so long as you do not pledge your IRA assets to secure the loan. In other words, you must use an unsecured loan.
If you use borrowed money, you must be ready to deal with Unrelated Business Income Tax (UBIT) and IRS form 990-T. When an IRA purchases real estate using a non-recourse mortgage loan, the debt financed portion of the property’s profits are subject to UBIT. Similarly, if an IRA-owned property is sold while a percentage of ownership is debt financed, the profits derived from the debt financed percentage are subject to Unrelated Business Income
For example, if you purchase a home for $100,000, with $50,000 from your IRA and $50,000 from an unsecured loan, and your net rental income is $2,000 per month, $1,000 per month of that income will be subject to UBIT and $1,000 will flow tax free in to your IRA. If you then sell the property for $150,000, about $25,000 of the profits from the sale will be subject to tax. The applicable tax rate is a sliding scale and ranges from 15% to 35% for tax year 2012.
Unrelated Business Income Tax (UBIT)
If you have a sizable IRA and plan to invest with leverage, offshore planning offers a solution to UBIT. Take a page from Mitt Romney’s Bain Capital playbook and use an Offshore Blocker Corporation.
Basically, Mr. Romney was able to grow his Self Directed IRA LLC to over $100 million through the use of leverage, UBIT Blocker Corporations, savvy investments, and international tax planning. To read more about his use of these structures,
click here for the NY Times and here for a very partisan article on the Huffington Post.
International tax planning and UBIT Blocker Corporations have been utilized by the largest American charities, such as Boys and Girls Club, for years and provide an important tax shield to nonprofits. I note that charities and retirement accounts are both U.S. tax exempt entities and must follow many of the same tax laws.
Commentary: Offshore Self Directed IRA LLCs and UBIT Blocker Corporations are legal tax mitigation techniques for tax exempt entities. It is beyond me why the use of international planning is so demonized in the media or why anyone would want to pay a cent more in tax than the law requires.
The use of offshore UBIT Blocker Corporations takes some explanation and I feel the need to go in to detail here. If you don’t want to read the minutia, just know that we are experienced in planning and building complex international structures and will be happy to work with you to structure your affairs in a tax efficient and compliant manner.
Generally, an IRA is exempt from U.S. federal income tax on its passive investment income and pays tax on most other types of income. This taxable income is referred to as Unrelated Business Taxable Income (UBTI). UBTI is defined as any net income derived by a tax-exempt entity from an unrelated trade or business that it regularly carries on. UBTI does not include dividends, interest, capital gains, and most rents from real estate.
UBTI does include a pro-rata share of rental income from real estate that is subject to “acquisition indebtedness.” Basically, the percentage of income that is treated as debt-financed is the percentage of the acquisition cost that is financed by borrowed funds. So, as stated above, if one-half of the purchase price of an asset is borrowed, then one-half of the income from the asset may be subject to UBIT.
Also, if a Self Directed IRA LLC invests in a business, the IRA’s share of the profits derived from that business is likely UBTI. If Indebtedness is incurred by a partnership or limited liability company of which the IRA is a member, the IRA will probably have UBTI. Partnership income from international hedge funds and active businesses is likely the source of Mr. Romney’s UBTI and the reason he requires UBIT Blocker Corporation(s).
However, debt incurred by a corporation is not viewed as debt incurred by a shareholder for this purpose. In other words, a corporation can take on debt which will not count against its shareholders (your IRA) and thereby not generate UBTI.
Because debt incurred by a corporation is not treated as debt of its shareholders, and there is an exclusion from UBIT for dividends received from a corporation, an investment in or held through a corporation generally does not result in UBIT.
So, the UBIT Blocker Corporation works by taking the income out of the taxable category of business income or income from leverage and placing it in the nontaxable category of a dividend. But, why must it be structured offshore? Simple, if the blocker corporation were in the United States, its income would be taxable in the U.S. at the corporate rate of 35%. Only after paying corporate level tax could the entity distribute a dividend to your IRA. By forming the UBIT Blocker Corporation offshore, in a country that will not tax its income, no U.S. tax need be paid by this entity.
Remember: We are talking about an offshore corporation wholly owned by a U.S. tax exempt retirement account. We do not consider the tax consequences of an active business owned by a U.S. citizen or resident.
The Self Directed IRA LLC Structure
It is not exceedingly expensive or complex to run your IRA like a big time investor. First, let’s consider the traditional Offshore Self Directed IRA LLC structure.
Step 1, we move your IRA account from your under performing broker in to a custodian experienced in Self Directed IRAs (the self directed custodian above). This gets you to a Self Directed IRA.
Step 2, we reach a Self Directed IRA LLC by having your new custodian invest all of your IRA assets in the offshore LLC we created with you as the manager. Once the funds go from the custodian to your Offshore Self Directed IRA LLC, you have checkbook control and can manage your IRA as you see fit.
In addition, the Self Directed IRA LLC allows for partnering with yourself and/or other investors. For example, you and three partners might decide to purchase and operate a large rental property. As this would generate only exempt rental income, a blocker corporation would not be required.
Now, let’s say you want to invest in a business or hedge fund (as Mr. Romney does) that will generate ordinary income, and thus UBTI. We need to add a UBIT Blocker Corporation to the mix by placing an offshore corporation between your Offshore Self Directed IRA LLC and your investments.
To allow for this type of investment, we form a UBIT Blocker Corporation in an offshore jurisdiction that will not tax its income. That UBIT Blocker Corporation is a wholly owned subsidiary of your Offshore Self Directed IRA LLC. Your IRA LLC invests money in the blocker corporation and the blocker corporation invests in those projects that are likely to generate ordinary income / leveraged income / UBTI.
In some cases, each investment is held in its own offshore LLC, which flows through to the blocker corporation. These LLCs might hold the shares of an active business, a hotel property, and a yacht that you purchased with three friends to be rented out for fishing and other events. The example above would require an Offshore Checkbook IRA LLC, a UBIT Blocker Corporation, and possibly three offshore LLCs to hold three major investments.
Converting your IRA in to a Self Directed IRA LLC gives you complete control over your most important investment account. Taking that Self Directed IRA LLC offshore allows you to access tax tools and investment models previously available only to the super wealthy.
Please contact Premier Offshore Investor at email@example.com or phone us at (619) 564-4062 for a free and confidential consultation and to learn more about the strategies described above. We will be happy to review your situation, answer any questions, and create a custom solution that fits your needs.
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