International Investments through Offshore Retirement Accounts

IRA when you give up US citizenship

What Happens to Your IRA when you give up US Citizenship / Expatriate?

Thousands of Americans will turn in their blue passports in the next few months. Some because of our crazy political climate, some to stop paying taxes into a broken system, and some because of FATCA and the international banking laws which make it impossible to live or do business abroad. This post will consider what happens to your IRA when you give up your US citizenship or expatriate from the United States.

Whatever your reason for giving up your US citizenship, you need to carefully plan the expatriation process. It’s be fraught with risks, costs, and problems for high net worth individuals.

First, let me define who is a “high net worth expatriate.” The IRS only cares about losing high earners and payors. They could give a damn about the rest of us.

When I consider what happens to your IRA when you give up US citizenship, I am referring only to this group high net worth expatriates.

According to the IRS, a high net worth expatriate is someone whose:

  • Average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than $151,000 for 2012, $155,000 for 2013, $157,000 for 2014, and $160,000 for 2015. As you can see, this amount goes up each year and is tied to inflation’
  • Net worth is $2 million or more on the date of your expatriation or termination of residency, or
  • Fails to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.

If you meet any of these criteria, you’re high net worth person (high value taxpayer) for US expatriation purposes, otherwise referred to as a “covered person.”

So, the question more properly framed is, what happens to your IRA when you give up your US citizenship or expatriate and you are a covered person?

  • High net worth covered persons pay tax as if their IRA was fully distributed to them on the day they expatriate.
  • The early distribution penalty does not apply.

The only published information from the IRS is Notice 2009-85. The discussion of specified tax deferred accounts Section 6 of this notice.

“The mark-to-market regime does not apply to specified tax deferred accounts. Instead, section 877A(e)(1)(A) provides that if a covered expatriate holds any interest in a specified tax deferred account (defined below) on the day before the expatriation date, such covered expatriate is treated as having received a distribution of his or her entire interest in such account on the day before the expatriation date. Within 60 days of receipt of a properly completed Form W-8CE, the custodian of a specified tax deferred account must advise the covered expatriate of the amount of the covered expatriate’s entire interest in his or her account on the day before his or her expatriation date.”

Note that the covered person is treated “as having” received a distribution. This is not the same as having your IRA account cancelled or closed. In fact, you have the option of continuing your IRA after giving up your US citizenship.

If you were to close your account and take a distribution, you’d be liable for the early distribution penalty. If you close your IRA as part of giving up US citizenship before reaching 59 1/2, you will pay a 10 percent early withdrawal penalty in addition to income tax on the amount withdrawn.

If you decide to keep the IRA open after expatriating, you’ll pay US tax when you take distributions from the account, presumably at age 70 ½. This tax will be calculated only on appreciation in the account from the date of expatriation.

That is to say, a covered person will pay US tax on all the gains in her account on the day she gives up her US citizenship. Then she’ll will pay US tax on the gains earned in that account after expatriating when she take the required distributions.

The IRA remains intact. All you did is “prepay” your US taxes on the account.

For example, you have $100,000 in your IRA on January 1, 2017 when you give up your US citizenship. You pay tax on this $100,000 on January 1, 2017 . You decide to keep the account open after expatriation and begin taking distributions 5 years later, in 2022. As of January 2022, your account is valued at $130,000. You will pay tax on the gain of $30,000 as you take these distributions.

Considering you will remain linked to the US tax system after expatiating through your IRA, you would have to be facing a very large early distribution penalty for it to make sense to keep an IRA open.

If you’re a 45 year old doctor who rolled a two million dollar defined benefit or profit sharing plan into an IRA, then you might keep the account going. If you have $150,000 in your IRA, pay the 10% penalty and be done with it.

I hope you have found this article on what happens to your IRA when you give up US citizenship to be helpful. The bottom line is that 95% of us should close our accounts and be done with the IRA. Only those facing large early distribution penalties should consider keeping their account open.

For more information on how to give up your US citizenship, and how to expatriate from the United States, please contact me at

Keep in mind that the first step in giving up your US citizenship is to get a second passport. Until you have a second passport in-hand, you can’t burn your blue passport. For ideas on where to buy a passport, see my article: 10 Best Second Passports.

risks to your IRA

Top 5 Risks to Your IRA

Most Americans think that their IRA is safe… and they would be wrong. Our IRAs and retirement accounts face risks from all sides. Here are the top 5 risks to your IRA and what you can do to protect your savings.

1. IRS Levy of your IRA or other retirement account.

The Federal government and the Internal Revenue Service can size your IRA for any tax debt. If you owe the great collector, or the computer says you do, then your retirement account is at risk.

Note that the IRS doesn’t need to go to court or otherwise prove you owe back taxes. In fact, none of the debtor protection laws apply the the Service. Quite frankly, then can do whatever they like… or whatever the computer tells them to do.

This is true even if you didn’t file a tax return. Let’s say you’re living in Panama and earning $30,000 a year. This is well below the Foreign Earned Income Exclusion, so you figure you won’t bother file your US returns. You won’t owe any money, so why go through the hassle and expense?

Here’s one of the reasons why: The IRS will get information from your foreign banks and brokerages. They will also receive information from US firms (Form 1099). The computer will interpret 100% of this as income and prepare a Substitute For Return on your behalf.

The SFR won’t consider the FEIE nor any other deductions or adjustments. Once in the system, a tax debt will be created. The IRS will send out a few letters by standard mail, which you probably won’t receive, and then the debt becomes final.

The fun starts when a collection agent is assigned to your case. He will seize any cash he can find in US banks. When that fails, he’ll go after any offshore bank that has a branch in the US.

When those lines come up dry, he’ll issue a levy against your retirement account. He can take 100% of your retirement savings up to the amount of the tax debt. He need not leave you a penny to pay your bills or support yourself.

And it gets worse. When the IRS takes your IRA, it’s a taxable distribution to you. Yes, you get to pay tax on the money the IRS seizes as if you voluntarily took it out. At least the IRS waives the 10% early withdrawal penalty on levys.

Fyi… if you voluntarily withdraw money from your IRA to pay the IRS, the 10% penalty will apply (in addition to it being a taxable distribution). If your IRA is stuck in the US and at risk, you may be better off telling the government to levy the account rather than you taking a distribution.

2. Missed Child Support Payments

If you owe back child support, Child Services can seize your IRA using a Qualified Domestic Relations Order. This is a court order that requires the plan administrator (US custodian) to transfer funds to your ex / baby mama / baby daddy.

You might also like to know that the IRS and child support agencies can revoke your US passport. A passport is not a right, it’s a privilege bestowed on us Americans from on high. For more on this, see Warning: The IRS Can Now Revoke Your Passport.

3. Obama

Obama laid the groundwork for the takeover of your retirement accounts by creating a test program that required IRAs be invested in US treasuries. myRA, launched in 2012 and was “upgraded” in 2016. It’s a retirement plan for new savers that allows them to invest in safe treasuries… because they are obviously not capable of choosing their own investments.

Take a read through the government website. You’ll find all kinds of references to safety, security and protecting the American worker.

Expect these talking points to come into focus in the next two years in an all out push to move your IRA to treasuries.

Note that this is not a partisan issue. I believe that both Republicans and Democrats will be forced to convert our IRAs to treasuries in the near future. Soon enough, it will be Trump or Hillary telling us how the government needs to protect its citizens by taking over management of our retirement accounts.

4. Civil Creditors

If you get sued, your IRA is at risk. The US bankruptcy statute allows you to protect about $1.1 million of retirement assets from creditors. But, that requires you to qualify for and go through bankruptcy. As a part of this process, your creditors will be able to breach multiple domestic asset protection structures and get paid… maybe not from your IRA, but they will collect.

Any time a US judge is making decisions about your finances, expect her to side with the plaintiff. The US system is focused on making the injured party whole. Very little is done to protect your rights (the defendant’s rights).

Proper planning will move your IRA out of the reach of creditors without requiring you go through bankruptcy.

5. Currency and Stock Market Risks

China and every other country is dumping US treasuries and selling off US stocks fast. China’s stash of American stocks sank by $126 billion, or 38 percent, from the end of July through March of this year. China also sold off about 20% of their US treasuries.

Combine this with the fact that gold is on a tear, and the writing’s on the wall for the US dollar. Whether you think we are in for a correction or a catastrophe, it’s time to diversify your retirement savings.

What can you do to protect your retirement account from a government looking to shore up its treasuries, IRS seizure and civil creditors, and diversify out of the dollar?

Take your IRA offshore before it’s too late.

I suggest that the first step in implementing the myRa plan on a larger scale is to block future IRA transfers offshore. The US is likely to eliminate the loophole that allows you to take control of your retirement account and move it out of their grasp in the next year.

Most experts agree that those who are already offshore when the hammer comes down will be safe. It would be nearly impossible to reach offshore IRAs that are invested in immovable assets like real estate and hardwoods (one of the most popular investments offshore today).

However, it will be very easy for the government to close the door. One rule change by the IRS and no more offshore IRA LLC transfers. And, once that door shuts, I guarantee it won’t be opened again.

If you’d like more information on protecting your retirement account, please see my Offshore IRA LLC page.  We will be happy to assist you in structuring your retirement account offshore and opening bank and brokerage accounts for that structure.

If you believe your IRA is at significant risk from civil creditors, you might also take a read through Protect Your IRA by Converting it into an Offshore Trust. This is a specialized asset protection structure we have developed for high risk clients.

I hope you have found this post on the top 5 risks to your IRA to be helpful. Please drop me a line to or call (619) 483-1708 for a confidential consultation on taking your retirement account offshore.

panama residency

How to get Residency in Panama Using Your IRA

Here’s how to get residency in Panama using your IRA or other US retirement account. If you want to get residency in Panama through investment, you can use your retirement account in one and only one opportunity.

First, let me mention the rules in play when you make an investment and get residency in Panama using your retirement account. These rules significantly restrict your options to get residency, but there is one path open you you.

Note that, even when you take your IRA or other retirement account offshore, you must follow all US IRA rules. If you get caught cheating, your entire IRA may be considered distributed, taxes due on the total amount (not just the amount used improperly), plus a 10% penalty for early withdrawal and other charges.

The most important IRA rule is that you can’t receive a personal benefit from investing your IRA. So, you can’t simply invest $x in Panama and get residency in return. The residency permit must be done as a side deal not directly related to the investment made by your IRA.

Second, you can’t borrow from your retirement account. As the owner of an IRA, you are prohibited from borrowing against the account for more than 60 days. Therefore, you can’t borrow from your IRA to invest in Panama. The investment must be made by your IRA and the asset must be titled in the name of your IRA or your IRA LLC.

Third, let’s consider the residency programs in Panama. For a complete list, see my article Top 6 Panama Residency Programs.

The options that require an investment are the Person of Means visa, the Friendly Nations Visa, and the Reforestation Visa.

Because a person with a US retirement account is likely a US citizen, and thus from a “friendly” nation, we will ignore the Reforestation Visa option. That visa is intended for people not from friendly nations. This is because the friendly nations investment program requires an investment of $20,000 and the reforestation visa requires an investment of $80,000. For a list of “friendlies”, see: Best Panama Residency by Investment Program.

So, we’re left with the Friendly Nations visa and the Person of Means investment offerings.

In order to qualify for residency in Panama using the Person of Means visa, you must a) deposit $300,000 in a bank account in Panama, 2) buy a home for at least $300,000, or 3) invest a minimum of $100,000 in a two-year certificate of deposit in a bank located in Panama and buy a home in Panama. The combined total of your CD and real estate should be at least $300,000.

The Person of Means visa requires that the bank deposit, CD, and/or real estate be in your name. You can’t use a corporation or trust. Because the investment in Panama for the Person of Means visa must be titled in your name, this program is not compatible with the US IRA rules.

Your IRA LLC, or assets purchased with your retirement account, must be titled in this manner:

US Custodian, Inc. FBO Your Name IRA # 55-55555555

Remember that, even after you take your IRA offshore through an IRA LLC, you will have a US custodian involved. You will be in control of the account and the custodian will be responsible for annual filings in the United States.

FBO = For the Benefit Of

And here lies the conflict – any investment made by your IRA must be titled in the name of your account. If you’re using an offshore IRA LLC, the investment can be titled in the name of your LLC. Under no circumstances may an IRA investment be titled in your name.

If you were to use IRA money to buy a home, CD, or deposit into a bank account in Panama, and that account is in your name (not in the name of your IRA), this would be a distribution subject to US taxes and penalties.

Now we’re left with the Friendly Nations visa. If you want to invest in Panama using your IRA or other retirement account and get residency in return, this is the only option available.

And the only investment compatible with both the IRA rules and the Friendly Nations Visa is teak. If you invest $20,000 in teak, you will get residency in Panama for free (included in the investment amount.

When you invest in teak to get residency in Panama through your IRA, you need to break-out the investment and the costs associated with residency. To avoid self dealing, you invest about $16,000 in teak through your IRA and pay other fees of about $4,000 from your personal savings (not your IRA account).

You will get teak of the same value had you invested $20,000 and avoid the IRA self dealing rules. And you and your family may all apply under the Friendly Nations visa with an investment in teak.

Note that this Panama residency option also avoids the issue of titling. You can hold the investment in teak in the name of your retirement account or in the name of your IRA LLC and process the Friendly Nations visa under your name.

If you would like to get residency in Panama using your IRA or other US retirement account, the Friendly Nations visa is your friend. For more information, please contact me at or call (619) 483-1708. We will be happy to work with you to get residency using your IRA.

Take Your IRA Offshore

Take Your IRA Offshore Before it’s too Late

If you want to diversify your IRA offshore or out of the US dollar, time is running out. From what I hear, Obama is looking to renew his push for myRA and forcing even more Americans to invest their IRAs in treasuries.

If you’ve forgotten the Obama myRA, here’s the new site they rolled out. The Obama retirement account plan is all about “helping” Americans save more and save more securely.

myRA is founded on two principles: 1) we sheep are incapable of selecting our own investments, and 2) we should be forced to invest in the most secure investment available – US treasuries. Fortunately, the government is here to watch over us.

The myRA program is for young Americans who don’t have a company sponsored plan. It will indoctrinate them into a government managed retirement account and is the test case for a nationalized retirement account system. Once they work out the bugs in the system, myRA will be rolled out to employer sponsored plans.

Most expect the process to go as follows:

  1. myRA program acceptance,
  2. Employer plans requiring an ever increasing percentage of treasuries,
  3. Eventually the majority of retirement accounts are in US government securities, and
  4. Prohibiting the placement of retirement account assets in “unsafe” investments like stocks, bonds, real estate, etc.

Somewhere in between steps 1 and 2 above, the government will prohibit the movement of retirement assets offshore. The program will begin with a media blitz on how risky foreign investments are for America’s seniors and will focus on 1 or 2 pensioners lost their shirts offshore.

Then the government will step in to protect us from ourselves by preventing the formation of LLCs owned by retirement accounts. The coupe de gras on offshore IRAs will come as a prohibition of the transfers of retirement money and assets out of the United States.

Note that nowhere in this series of events is the forced repatriation of existing retirement accounts. That’s because I, and most others who study this situation, believe those who are offshore now will be grandfathered in. We have a few reasons for this belief:

First, vast quantities of generational wealth are stored in offshore IRA LLCs. America’s wealthiest families are fine with a program that protects us sheep, but not when it impacts them.

The most well documented of these accounts was back in the 2012 presidential election. Offshore IRA LLCs were in the press that year because Mitt Romney held his IRA investments abroad. Click here for a 2012 article from the Wall Street Journal.

Second, these offshore structures have specific tax usages / benefits for offshore IRAs. Forcing existing IRA LLCs back to the USA  would cause havoc with the Unrelated Business Income Tax section of the US code. I won’t bore you with the details, but suffice it to say, this would force hundreds of millions of active investments to be unwound.

If you want to read on how to use an offshore IRA LLC structure to minimize Unrelated Business Income Tax from leverage, here are two thrilling articles on this topic:

Third, many offshore IRA LLCs are invested in real estate and other assets which can’t be seized or easily liquidated to comply with a demand to repatriate. Attempting to bring back offshore IRAs would create an administrative and media nightmare that the government is likely to look to avoid.

For these reasons, I expect existing offshore IRA LLCs to be granted an exception to the new legislation. You might not be able to add to them, but whatever is offshore when the hammer comes down will be allowed to remain there.

Note that this opinion is not based on politics, but on experience backed by research. It won’t matter who our next president is, the demands of our deficit and our currency bubble must be served. The easiest way to shore up the damn is to force retirement accounts to invest in US treasuries and begin again with the unfettered printing of money.

If Obama doesn’t nationalize your IRA through executive order, either Trump or Hillary will be forced to keep the engine running. Expect both to expand on myRA and then require you to invest your retirement account in US Treasuries.

If you want Uncle Sam to manage your investments for you, then do nothing. If you want to take control of your retirement account and diversify out of the US, then you need to act quickly. The window of opportunity on taking your IRA offshore is closing fast.

I hope you have found this article on the future of our retirement accounts helpful… or, at least, food for thought. If you would like more information on how to take your retirement account offshore, see my Self Directed IRA page.

You can also reach me directly at or (619) 483-1708 to discuss moving your retirement account offshore.

protect your IRA

Protect Your IRA by Converting it into an Offshore Trust

You know that offshore asset protection trusts offer the best security available. They’re an excellent way to protect your after tax savings. But, what of your retirement account? In this post I’ll show you how to protect your IRA by converting it into an offshore trust.

Let me start by talking about where to build your fortress, then we’ll review the safety features of an offshore trust. Finally, we will get to how to protect your IRA by adding those features to an offshore IRA LLC structure.

Here are the pillars to solid offshore asset protection:

Jurisdiction: Where you incorporate your offshore trust or LLC is just as important as how you build it out.

History: Select a country with a long history of standing up for plaintiffs rights. One that has been offering international trust services for decades without being broken and at a high / professional level.

Case Law: Select a country where offshore asset protection statutes have been tested in many court battles. If those cases have been heard in both the US and in the foreign jurisdiction, all the better.

Quality Local Representatives: Hire a trust company and protector service staffed by quality attorneys with licenses from major jurisdictions.

For all of the above reasons, Cook Islands is the best country in which to build an offshore asset protection structure. The best jurisdiction in which to make your stand.

A Cook Islands Trust is the strongest form of asset protection worldwide.  It has the most proven asset protection case law history in the world. Representatives in Cook Islands are New Zealand or Australian attorneys with decades of experience defending client’s assets. The Cook Islands ticks every box.

Next, let’s talk about the structure of an offshore trust for asset protection. What we call the “trust” is comprised of several components.

Settlor: The settlor of the trust is the owner of the assets going and the person creating the trust. The person funding the trust / transferring their assets to the trust.

Trustee: The person or firm outside of the United States that will manage your trust and handle local filing and compliance. Should you pass away, the trustee will distribute your assets per your letter of wishes (see below).

Protector: The protector, also based outside of the United States, steps in to manage your assets within the Trust if you come under duress. If someone sues you, then you transfer management responsibilities to the protector.

Offshore LLC Management Company: Most clients want to maintain control of their assets until and unless they come under duress. For this reason, we form an offshore LLC to manage the trust. The trust transfers its cash to this asset management firm, which happens to be owned and controlled by the settlor. If the settlor comes under duress or attack, he returns this responsibility to the trust and then the protector.

Trust Document: The trust document is the very long and detailed contract between the settlor, trustee and protector. It’s the heart of your asset protection plan and what must stand up to US, IRS, and creditor scrutiny.

Beneficiaries: Those who will receive the assets of the trust should something happen to the settlor(s).

Letter of Wishes: A letter sent by the settlor to the trustee telling him or her how to disburse the trust assets at your passing. This letter can be as simple or complex as you like.

That’s a very brief summary of how to structure an offshore trust. Now we are ready to apply those tools to protect your IRA. For more information on trusts, see my International Trust page for more detailed information.

Remember there are a bunch of IRA rules to follow to ensure your account remains tax deferred in the United States. So, this is not as simple as forming a trust and putting your IRA money in that trust. That would be an improper distribution resulting in taxes and penalties on your retirement money.

  • See my Offshore IRA page for the basics of moving your retirement account offshore.

When we take an IRA offshore we form an LLC in a foreign country that won’t tax your investments. When we want to maximize the protection for your IRA, we form that LLC in the Cook Islands.

In this way, the same history, law and professional services will apply to your Limited Liability Company as give the offshore asset protection trust it’s standing.

The offshore IRA LLC has a Member (like a Settlor) and a Manager (like a Protector). By using a Cook Islands protector as the Manager, we maximize protection. The LLC will also have a detailed Operating Agreement which uses many of the same asset protection tools as is found in an international trust agreement.

Before I get to that, let’s talk about the Member. This is a rather strange concept when we have an IRA and an LLC.

In most situations, the Member of an LLC is the person or persons who will control the company. Not in the case of an offshore IRA LLC.

IRA rules dictate that the Member must be the IRA account… not a person, nor you the beneficial owner of the account. The account itself owns the LLC. That is to say, the Member is the owner of the underlying assets of the company, and that owner is the account, not you.

The ownership statement of your offshore IRA LLC will look something like this: IRA Custodian Company, Inc. FBO Bob Smith IRA Account #55-55555555

  • Remember that all offshore IRA LLCs must have a US custodian. For more on that, see my Offshore IRA page.
  • FBO = For the Benefit of

It’s the Manager and the Operating Agreement where we have room to maneuver. We’ve spent many weeks working with experts around the world to convert our strongest offshore trust document into an offshore IRA LLC Operating Agreement.

We’ve also contracted with the very best protectors in the business, who are based in the Cook Islands, to act as the Manager of your offshore IRA LLC. They will manage your IRA investments to your specifications and create a solid barrier between your account and any civil creditors.

By combining the benefits of an offshore trust with the IRA rules, we have developed a custom max protect solution you will not find anywhere else. If you have a high risk of litigation, or otherwise believe your retirement assets will be at risk if under your direct control, we can help you protect your IRA by going offshore through a Cook Islands LLC and adding on a Cook Islands protector as your Manager.

I hope you’ve found this post on how to convert your IRA into an offshore trust to be helpful. Please contact me at or call (619) 483-1708 for a confidential consultation on how to max protect your IRA when going offshore.

These services are meant to protect your IRA from future civil creditors. We will not build a structure to hide assets from the IRS or the US Government. Also, offshore asset protection is only available if you are not currently in litigation. Going offshore after the harm is done could be a fraudulent conveyance and thus illegal.

Foreign Assets

Offshore IRA LLC Tax Analysis

Moving your retirement account in to an offshore self directed IRA LLC is the best (and really, the only) way to diversify out of the U.S., protect your assets from future creditors, and boost returns by investing in more dynamic markets.

I write quite a bit on why and how to move your account into an offshore self directed IRA LLC.  This article is for those who want to get in to the nitty gritty of how it works from the IRS’s perspective.  This post on the self directed IRA will include all relevant U.S. Internal Revenue Tax Code (IRC) and ERISA sections.

The first step in taking your IRA offshore and moving it in to a self directed IRA LLC is to open an account with a self directed custodian that allows for this type of structure.  Note that you are required to use a U.S. custodian, but this custodian has no control over your assets or investments once they reach the IRA LLC.

We work with a number of self directed custodians/administrators, and will be happy to setup the account for you.  If you prefer to do your own research, please Google Midland IRA and Entrust… these are the most efficient and specialize in offshore transactions.  There are others found on domestic structures (IRA Services, for example).

Once your account is established, your administrator will give you an account number that will look something like: Midland IRA FBO Christian Reeves #55555-00.  This is your self directed IRA account name and the “owner” of the offshore IRA LLC that we will form for you.

More specifically, this account will acquire a 100% of the “beneficial interest” of the offshore IRA LLC and hold 100% of the “membership interest” in your offshore company.  According to IRC § 4875(e)(2)(G) and the ERISA Regs at 2510.3-101(b)(1), the beneficial interest in an LLC is the equity interest in the assets of the entity, as well as the beneficial owner of the entity.

So, all of that is to say that your IRA account is the equity holder and legal owner of the assets and the offshore IRA LLC we form for you.  The custodian’s job is to manage IRS reporting and make the investment of your retirement account in to your offshore IRA LLC… that’s it.  From there, the owner of the offshore IRA LLC is your self directed IRA.

Your control over the offshore self directed IRA LLC is defined in the operating agreement of the LLC which we provide.  This document has been reviewed and approved by various banks and the custodians with which we work.  It ensures all parties the proper levels of protection and your rights to control the investments and open bank and brokerage accounts in the name of the offshore LLC.

The operating agreement and its importance to the structure is defined in what we call the “plan asset rule” under ERISA Reg. 2510-3-101(a)(2).  This regulation allows you (the beneficial owner of the IRA account) to act as the manager and exercise control over the offshore IRA LLC and its investments.  As such, it requires you to manage the assets for the benefit of the retirement account, just as a professional fiduciary would.  This means you must do your due diligence in all investment decisions and not use the assets for your personal benefit.  You are to manage the offshore self directed IRA LLC as if it where someone else’s money.

This operating agreement also sets out the rights and duties of the owner of the LLC (your account).  These terms are always very broad, giving it the authority to open accounts, modify the documents or the LLC, and appoint the manager (you).  Most importantly, the document allows the account to transfer these authorities to the manager… so, you can take control over the LLC.

Note that the operating agreement is signed by your custodian on behalf of the IRA, you as the beneficial owner of the IRA, and then you again as the manager of the LLC.

The operating agreement also transfers all authority and control over the offshore self directed IRA LLC to you, and away from the administrator/custodian.  You are thus the only one authorized to make investments, open accounts, and operate the offshore LLC.  The custodian is relegated to filing annual reports with the IRS.

That is to say, the custodian makes only one investment:  your IRA account in to the LLC.  From there, you are authorized to:

  • Make all investment decisions,
  • use funds for the upkeep and improvement of your investments (such as for improvements in real estate), and
  • control the sale/disposition of assets.* A corporation can be used as a UBIT blocker, but not as the primary (parent) entity.  We are working on a new structure for investments in Panama, which doesn’t have an LLC statute, but their Foundation laws can be used to create a trust/LLC hybrid.So, because the offshore IRA LLC we have designed is a disregarded entity (has only one member and is a limited liability company), it is an eligible entity under Treasury Regulation 301.7701-3(a) and (b).  As such, it is not required to file either federal or state income tax returns.  Also, no State Franchise Tax or other reporting will be required.There is an exception to the default rule that your offshore IRA LLC will have no filing obligations… and that the U.S. administrator/custodian will handle any reporting obligations other than those described here.  If you generate Unrelated Business Income in your IRA, or use a UBIT blocker corporation, you’ll need to file IRS Form 3520 and may have other reporting obligations.When your IRA invests in an active business, or uses borrowed funds (such as a mortgage or leverage in a brokerage account), then you will generate UBI and will be required to pay Unrelated Business Income Tax.  Because your structure is offshore, you may use a UBIT blocker corporation to eliminate this 35% tax.  This allows all profits to flow tax free (ROTH) or tax deferred (traditional) in to your IRA LLC, and thus in to your IRA.  This is one of the major benefits of moving your IRA in to an offshore self directed IRA LLC.  UBIT blocker structures are not available in the United States.
  • So, if you employ a UBIT blocker, or generate active income in your IRA LLC, then you will need to file additional forms.
  • There are a number of UBI and UBIT blocker corporation articles on this site, so I will just describe it briefly here.
  • Also, none of the international forms are required for a typical offshore IRA LLC structure.  The big one is the Foreign Bank Account Report, which is required for bank or brokerage accounts outside of the United States that hold more than $10,000.  This form is specifically excluded for offshore self directed IRA LLCs (search FBAR at for additional information).
  • Your objective in an offshore self directed IRA LLC structure is to eliminate all U.S. tax filing and paying obligations.  Therefore, your offshore company must be a “disregarded entity” under the IRS “check the box” rules.  This is achieved by 1) using an LLC rather than a corporation and 2) that LLC having only one member.  A single member LLC is a disregarded entity, while a multi-member LLC is considered a partnership.  (For more information, see:  Treas. Reg. § 301.7701-2(b), (c)(1) and (c)(2).)
  • The tax classification of an offshore IRA LLC is quite different than an offshore corporation, and an LLC is generally the required entity – not a corporation.  Because very few offshore jurisdictions (those that won’t tax your returns) offer compatible limited liability companies, we usually form IRA structures in Belize and Nevis.

I hope this article on the taxation of an offshore self directed IRA LLC has been helpful.  If you have any questions, please give us a call or send an email to  We will be happy to work with you to move your retirement account outside of the U.S. and ensure it remains in compliance with all applicable U.S. tax laws.

Diversify Your IRA

Proof You Should Diversify Your IRA Offshore Now

A record high stock market in the U.S. exposes the suckers! Don’t be one of them.  Diversify your IRA offshore as soon as possible.  This article offers statistical proof that you should diversify your IRA abroad.  U.S. returns over the next 10 years will wipe out your retirement account.

While everyone is running to dump money in to the stock market, the smart investors are taking their profits and moving to investments with more upside.  When a market is at an all time high, it means run… not invest more!  If you wanted to get in to stocks, you should have been buying in 2009 after the market bottomed out.  Now, you are just going to buy high and sell low.  Even the most optimistic outlook is for slow U.S. growth.  You will do far better to diversify your IRA in to foreign real estate or markets with significant growth potential.

What Alan Greenspan once called “irrational exuberance,” is back.  I hear smart people… doctors and lawyers and such who’ve sat on the sidelines for the last four years and are all excited about investing in the United States stock market.

Remember, if you follow the herd, you’ll be left holding the bank, when the smart money gets out… and they will get out.  Now is the time to diversify your IRA.

Please don’t get me wrong.  I am not arguing against stocks or the U.S. market in general.  If you have a 10 or 20-year plan, stick with it.  Remember that the 2008 crash didn’t wipe out investor’s retirement accounts, it just delayed their plans.  If you had stayed in the market, you would have made back your losses and then some.

What I’m saying is that now is the time to ignore the financial news and diversify in to international markets.  Studies show that investors who received no news performed better than those who received a constant flow of good and bad news.  Don’t get caught up in the reactionary cycle.

Statistical Proof That You Should Diversify Your IRA Offshore

Yes, the U.S. markets are at record highs.  From here, “basic math suggests that U.S. asset prices have less room to rise.  This means that the long-run outlook is for lower returns ahead.”  This, according to Wade Pfau, Professor of Retirement Studies at American College for Financial Services, a Ph.D. economist, means you should diversify or reduce your IRA distributions.

Conventional wisdom says that you can withdraw 4% to 5% from your retirement account each year and have cash left over at the end of 30 years.  If you are retired more than 30 years, you need to take out less.  It also assumes you are 50% in stocks and 50% in bonds.  This assumes you are earning 3.5% to 4% on your IRA.  If this goes down, your withdrawal rate must also decrease.

Based on Pfau’s recent study of stock and bond returns since 1926, the amount you will be able to take out of your U.S. based retirement account is a function of your return on investment.  Because this return is expected to be lower than the previous decade (because the market is at record highs), you’ll need to adjust your withdrawals or increase your returns.  I suggest you focus on the second option and diversify your IRA out of the U.S.

Specifically, the amount you can safely take out of your retirement account has gone down from 4% or 5% to just 3%.  To support his analysis, Prof. Pfau cites the U.S. Treasury markets.  The historic yield has been 3.5% and is now only 2.6%.  Current 10-year yields generally correlate to the total return you can expect over the next decade.

This, combined with earning ratios on the S&P 500, get you to an average return in the U.S. of 2.2% after inflation over the next decade… less than ½ of the historic average.

Assuming your IRA is $1 million, a 3% drawdown means you have only $30,000 a year to live on.  With Social Security and other income, you’ll be lucky to end up with $40,000 before taxes.  To me, this means I should consider living abroad… as well as investing offshore… where the cost of living can be a fraction of the U.S.

Prof. Pfau’s computer model indicates that pulling an inflation-adjusted amount of $40,000 (4%) per year from a $1 million dollar IRA ran the account dry in 57% of the simulations.  Taking $30,000 in distributions crashed the account only 24% of the time and a 5% withdrawal emptied it 82% of the time within 30 years.

Where to Invest Your IRA

The solution is to use diversification to stretch your cash and extend your retirement.  This is especially urgent when you consider the length of the average retirement.  We are living longer, and our retirement years are more than 30, thus we are outliving our savings.

“Tell your dollars where to go rather than asking them where they went.”  Roger W. Badson, 1875 to 1967

In order to diversify your IRA, the first step is to take control over your account by moving it in to an offshore IRA LLC.  Once that is complete, you can invest in just about anything you like outside of the United States.

So, where might you put your investment dollars?  If you consider only historic highs, most EU countries are well off their averages and a good buy.  The concern is that many perceive currency and other risks because of the nature of the Union.

*To be honest, I’m not an expert on the EU.  I’m focused on south of the U.S. of A.

My favorite countries for diversification are Mexico, Panama and Colombia.  Most of the drug wars have come to an end in Mexico and they’ve rewritten the laws that limited investments in coastal real estate… or required you to use a banker’s trust or other convoluted structure.  So long as you spend the time and get to know the city of Mexico you’ll invest in, I believe it is one of the best options available.

Those of you who read my columns regularly know that I’m a big fan of Panama and that my business and investments are centered there.  I prefer Panama City to other areas, and now believe that the secondary districts of the city hold the most promise.

For example, if I were to diversify my IRA in to Panama today, I would avoid Punta Pacifica and Pitea.  I’d look to San Francisco, around Park Omar, and parts of 50th Street.  Most of the gringo dollars going in to Panama are flowing in to Pitea, around Trump Tower, so I’d focus elsewhere.

The same holds true for Colombia.  My preferred city is Medellin and I’d stay away from the ever popular “golden mile.”  I’d look for condos around parks and within walking distance to cafes and entertainment.  For me, the prices within the mile are just too high.

Whenever you invest offshore, you must understand the region of the city you are buying in to.  Each area will perform differently and will have differing long term prospects.  Doing your homework is 10 times more important offshore than on… especially when there’s no MLS.

If you would like additional information on where to invest, I suggest  For more costs and rules related to taking your IRA offshore, please send me an email to  I’ll be happy to answer any questions you may have.

Return on U.S. Treasuries

The Real Return on a U.S. Treasury

The real return on U.S. Treasuries is a miserable 0.6% per year.  If you don’t think you can do better than this offshore, then leave your retirement with Fidelity and risk it being taken over by the U.S government and MyRa.

If you think you can beat the real return on U.S. Treasuries by diversifying out of the United States and out of the U.S. dollar, then get your retirement account out of harms way ASAP.

If you buy a U.S. Treasury bond today (July 2014), which is due in 2024, the yield to maturity is 2.6%.  If you subtract inflation from this lofty percentage, it becomes a miserable 0.6% per year.

If you, like many of my readers, are concerned with the U.S. dollar and the possibility of significant inflation in America, you can always buy a TIPS bond.  The TIPS protects against inflation and is returning all of 0.4% per year.

There has been a lot of talk of late that the U.S. will nationalize the retirement account system and block foreign investments.  If this happens, all retirement accounts will be transferred to government control and forced to buy U.S. Treasuries, the most secure investment around… and the nationalization will be sold as protecting Americans.

Now, I don’t know if this will occur, but I do know how to protect you from the possibility.  Take your IRA offshore now, by moving it in to an Offshore IRA LLC.  This will give you control over your assets and investments, all while keeping the government out of your affairs.

If the return on U.S. Treasuries excites you, and you don’t believe the U.S. will come for your retirement account, then do nothing.  If you want to protect your assets and diversify offshore, please take a read through my various articles on offshore IRAs.

As I said, I don’t know what will happen, but I know how to eliminate the risk.  Most advisors agree that, once your IRA is offshore, it will be grandfathered in and no changes in the law will affect its status.  Therefore, time is of the essence.

The reason for this opinion is simple:  it would be near impossible to force the sale of real estate and physical assets (like gold) that are held offshore.  It is much more likely that future formations will be prohibited.  Those already setup will be allowed to continue.

“Tell your dollars where to go rather than asking them where they went.” – Roger W. Badson, 1875 to 1967

If you have any questions, feel free to phone us or drop me an email at  I will be happy to work with you to get your account under your control and out of the United Sates.

Offshore IRA

Invest in What You Know with an Offshore IRA

Follow the advice of Warren Buffet and many others who came before him and invest in what you know.  An offshore IRA gives you the power to diversify offshore and invest in what you understand at the right price.

An offshore IRA placed in an offshore company, where you are the manager of that company, gives you checkbook control.  The IRS can then pay your research and travel expenses and you can buy what you know, which is not possible in a self directed IRA.

  • The offshore company is usually structured as a limited liability company.

In a self directed IRA, you can recommend investments to your custodian or advisor.  If he is comfortable with the investment, he will proceed.  If he is not, then he will block the transfer… which is quite common with offshore investments.

The bottom line is that the custodian does not have the time or desire to understand and vet the offshore project.  Are you going to pay him thousands to visit a build in Panama?  Probably not… but you are willing to spend your time and money to get to know the city and the investment.

  • The custodian has some liability if the investment goes south.  In an offshore IRA LLC, this is all on your shoulders.

So, while an offshore real estate investment is filled with risk and uncertainty for the self directed custodian, it is something you can become knowledgeable in, which means it is the perfect investment for your offshore IRA.

If you want to research and invest in high returning international real estate or hard assets, like physical gold or wood, you should be making these investments through an offshore IRA held by an offshore company.

You should only buy what you know, and you are the only one who is willing to spend the time and make the effort to get to know a real estate project offshore.

Physical Gold

Buy Gold in an Offshore IRA

When you buy gold in an offshore IRA, you create a hedge against currency risks, move assets out of the United States, and maximize asset protection, all the while maintaining the tax benefits of the retirement account.  Buy gold in an offshore IRA LLC to maximize the benefits of taking your retirement account offshore.

When you invest in only U.S. stocks and U.S. dollar denominated assets, you place your retirement at risk.  Diversify out of the U.S. by moving your retirement account in to an offshore IRA LLC and then buy gold in an offshore account.

When you buy gold in an offshore IRA LLC, you create a hedge against currency devaluation, economic turmoil, and volatile markets.  As I write this post, the price of gold is lower and more attractive than it has been in years.  But, I suggest you buy gold in an offshore IRA at almost any price.  When you hold gold as a hedge against catastrophic risks, it makes little long term difference where the spot price moves.  Buying gold in an offshore IRA LLC is the ultimate retirement insurance policy.

When you take your IRA offshore, you take control over all account decisions.  You choose your investment mix and can reduce volatility and risk while safeguarding your standard of living.  This type of control is not available onshore.  Yes, you can form a domestic IRA LLC, but you will be limited to U.S. investments and tied to the U.S. government.

*Tax Tip:  You are not required to report gold held in your name offshore.  This is not an issue for gold in an offshore IRA, but it is for those who buy in a taxable account.  For more information on this topic, check out my article on gold.

Note that I am referring to physical ownership of gold and other hard assets.  I never recommend gold certificates or holding facilities like Perth Mint.  Unless you take possession of the assets, they must be reported to the IRS and are not a true hedge against catastrophic events.

When you buy gold in an offshore IRA, you have the same tax benefits and responsibilities as if you made the investment in the United States.  You are acting as the investment manager for your offshore IRA and must follow U.S. rules while offshore.  This means that you may buy gold bullion and Golden Eagle coins, but you may not buy collectable gold coins.

When you buy gold in an offshore IRA, you must be buying it for the value of the gold.  If the coin has a value in addition to its gold content, it is probably not a permitted investment.

I recommend you buy gold in an offshore IRA and take possession of that gold.  We work with firms in Zurich, Switzerland and Panama City, Panama that offer bullion in just about any amount and private vaults that will store it in complete anonymity.  The private vault company we work with in Panama will allow you to store just about any investment asset.

If you search the web for how to buy gold in an IRA or how to buy gold in an offshore IRA, you will find a number of U.S. providers.  There are even some U.S. firms offering to buy foreign gold through a self directed IRA, without an offshore LLC or offshore bank account.  This makes no sense to me.  There is no value to going offshore if you are not going to take control over the investments.

When you use a self directed IRA, you can “direct” the custodian to make certain investments.  You can’t force him to make an investment, but you can request and suggest investments.  Also, all investments in the self directed account are under the control of the custodian/investment manager.  If the U.S. comes calling, and tells him to bring the money back to invest in U.S. Treasuries or in the MyRa scam (see my article on MyRa), he will do so.  You have very little control over the investments in your retirement account if things go bad or you want to make an investment that the custodian is not comfortable with.  If you are buying gold in an offshore IRA as a hedge against catastrophic risks, you must use an offshore LLC.

I also note that the self directed custodian/investment manager earns a transaction fee from each investment you ask him to make.  If he picks up the phone, he’s getting paid.  If you move your retirement account in to an offshore IRA LLC, you make the investments, choose your gold broker, your vault, and the level of protection you feel is necessary.  You will pay no transaction fees to the custodian.

If you want to buy gold in an offshore IRA, I suggest you go all in and dump the self directed U.S. controlled investment advisor/custodian.  When you form an offshore IRA LLC, you are the signor on the bank account, gold purchase contract, and the vault.  No one has access to or control over your investments.  If you go offshore, then go offshore.

To clarify, when you buy gold in an offshore IRA LLC, there is a U.S. custodian involved, but he has no control over your investments or accounts.  His job is to invest your retirement account in to the offshore LLC.  Once the money is in the LLC, the custodian is responsible for annual reporting to the IRS… that’s it.  He doesn’t charge a transaction fee on your investments in the LLC and has no control over your retirement assets.

As I said above, you must follow the same rules offshore as a professional advisor follows onshore.  My point is that the choice of what to do if the U.S. decides to force retirement accounts to invest in Treasuries, is yours.  The decision to comply or not comply is yours and not the custodian’s.

Also, most experts believe that offshore IRA LLCs will be grandfathered in should the IRS go after foreign transactions.  They may close IRAs and prohibit the formation of new IRA LLCs (or the funding of offshore structures), but it is unlikely they will go after existing entities.

If you buy gold in an offshore IRA, go offshore with an LLC.  If you plan on using a self directed IRA without an LLC, then save a few dollars and buy the gold in the United States.  There is no reason to go offshore with a self directed account.

I hope this article on why you should buy gold in an offshore IRA has been helpful.  We all come at risk and diversification from different points of view.  If you want a hedge against catastrophic events, move your assets out of harms way and out of the control of a U.S. custodian with an offshore IRA LLC.  If you think this risk is minimal, then a domestic self directed IRA is all you need.

Feel free to phone or email us at for a confidential consultation.  We will be happy to help you take your retirement account offshore and diversify out of the United States.

Real Estate in an Offshore IRA

Distribute Real Estate in an Offshore IRA

So, you’ve diversified your retirement account and invested in real estate in an offshore IRA. . .great.  Now you need to take a distribution, what should you do?  In this article, I will describe how to distribute real estate in an offshore IRA.

 Rental real estate in an offshore IRA is one of the highest returning investments my clients have.  The problem is, the primary asset can’t be divided up and sold to pay any taxes due on required distributions when you turn 70 ½ or at another age to reduce your net tax rate.

The same problem occurs when you decide you want to live in the property.  To spend even one night in the home, you must distribute all of it from your account.

Note: One of the most common and reasonable questions I get is, “If I want to spend 2 weeks a year in the rental property, can I pay fair market value rent or take a distribution of 2/52nds (2 weeks out of 52 weeks in a year) of value?”  The answer is a resounding NO.  You may not spend any time in the property while it’s in your retirement account.  The fact that the real estate is in an offshore IRA makes no difference – you must follow the same rules.

 With this in mind, before you buy real estate in an offshore IRA, plan ahead for the forced distributions or the complete distribution if you plan to live in the property someday.  This means you must have the cash in savings or in other liquid IRA investments to cover the taxes due.

Of course, if the rental property is cash flow positive, you can use the rental income to pay the taxes.  However, because you should not use non-IRA money (i.e., savings) to cover IRA expenses, repairs, or costs incurred when the tenant moves out, be sure to run a reserve of several months before taking out funds to pay Uncle Sam.

The next item to consider early on when you invest in real estate in an offshore IRA is whether to convert to a ROTH.  I will discuss ROTH conversions for offshore investors in more detail in a future article.  For now, if you expect a return of 10-20% per year, and your income and tax bracket are  low (maybe you recently retired), converting before buying real estate in an offshore IRA may pay off big.  I understand it’s tough to pay taxes today for a potential savings in the future, but, if the upside is big in your market, you may take this tax gamble.

If you’ve held real estate in an offshore IRA for a few years, and it has maxed out on appreciation, then a ROTH conversion is unlikely to be beneficial.  Now you need to consider longer term planning.  For example, if you wish to live in the property 10 years from now, take a 1/10th distribution each year.  This will allow you to manage the tax payments and possibly reduce your total tax paid by keeping you in a lower tax bracket throughout the decade.

To re-title 10% of the property, you must go into the recorder’s office and enter the change into the record.  Hopefully, as in most U.S. states, you can make the transfer at zero value.

Remember that each of these distribution sis taxable in the U.S. and made at ordinary income rates.  I assume you have reached an age where distributions may be made without a 10% penalty.

Another way to reduce your net tax when you distribute real estate in an offshore IRA is to cut out your high tax state.  If you are considering moving offshore, or to a lower tax state, make the move 12 months before you take the distribution.

For example, if you are living in California, a distribution of real estate in an offshore IRA may be taxed at 10% or more.  The same distribution to a tax resident of Belize or Panama should be at zero state tax . . .of course, federal tax still applies.

Finally, the Foreign Tax Credit may apply and provide a dollar for dollar credit for any tax you paid to the country where the property is located.  Considering IRA distributions are taxed at ordinary rates, it’s unlikely the Foreign Tax Credit will totally eliminate U.S. tax, but it will ensure you don’t pay double.

I note that some countries charge transfer taxes and duties rather than a capital gains tax.  Special attention should be paid to these, because they may not qualify for the credit but might be added to the property’s basis and therefore reduce your taxable profit.

If you are considering taking your IRA offshore, or would like to set up a specialized real estate investment structure, please contact us at for a confidential consultation.  We will be happy to work with you to structure your offshore IRA in a tax efficient manner.

Offshore Captive Insurance Company

Can I Invest in a Business with my IRA?

Surprisingly, yes you can invest in an active business with your retirement account. There are a many caveats and limitations, but you can usually lend money to a business, purchase shares in a corporation or LLC, or buy in as a partner receiving a share of the profits (flow-through structures).

Now, let’s talk about those limitations:

First, if you are investing in a business in the United States, your IRA can’t own shares of an S-Corporation.  This is not an IRA rule, but rather a U.S. corporate statute which requires owners of S-Corps to be U.S. persons. In other words, no foreign person (for tax purposes), entity, or tax exempt /preferred structure may invest in a business structured as an S-Corp.

Next, you can’t invest in a business of which you are a highly compensated employee. Basically, the IRS wants to make it difficult for you to take money out of your retirement account as salary and thereby circumvent the distribution rules.

A highly compensated employee is an individual who:

  • Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
  • For the preceding year, received compensation from the business of more than $115,000 (if the preceding year is 2012 or 2013), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.

I note that, if you draw a salary from a business you invest in using your IRA, you open yourself up to audit on that issue. This is especially true if you also take expense reimbursements and other payments that could be categorized as salary. I always recommend clients not take a salary when investing through a retirement account. And, if you do take a salary, to keep very good accounting records on all transactions to ensure they are below the threshold.

Next, your retirement account is prohibited from investing in a business of which you own or control more than 50%, or which is owned or controlled by any “disqualified person.” The first part of this rule is simple enough: you may own up to 50% of a business or corporation through your retirement account. To put it another way, you can’t invest in an entity (corporation, partnership, trust or estate) owned or controlled more than 50 percent by you…straightforward enough.

Now, let’s talk about who else (other than you, the owner of the account) is a disqualified person. In this section, the IRS is attempting to limit any conflicts of interest involving your IRA and related parties and to ensure all transactions benefit the retirement account and not the IRA owner.

A “disqualified person” (IRC Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA owner, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.

A disqualified person is defined as follows:

  • A fiduciary, which includes the IRA holder, participant, or person having authority over making IRA investments,
  • A person providing services to the plan such as the trustee or custodian,
  • The employer who created the plan or an employee organization any of whose members are covered by the plan,
  • A spouse, parents, grandparents, children, grandchildren, spouses of the fiduciary’s children and grandchildren of a disqualified person,
  • An entity (corporation, partnership, trust or estate) owned or controlled more than 50 percent by a disqualified person, and
  • A 10 percent owner, officer, director, partner, joint venture, or highly compensated employee of a disqualified person.

Note: brothers, sisters, aunts, uncles, cousins, step-brothers, step-sisters, and friends are NOT treated as “Disqualified Persons”.

What will happen if you (whether by accident or intentionally) break one of these many rules? If the IRS finds out, the consequences will be swift and severe. Specifically, if an IRA owner or his or her beneficiaries engage in a prohibited transaction at any time during the year, the account stops being an IRA as of the first day of that year and major penalties apply.

This means that 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.

In addition, the IRA holder or beneficiary would be subject to a 15% penalty, as well as a 10% early distribution penalty, if the you are under the age of 59 1/2.

The prohibited transaction rules are extremely broad and the penalties harsh (immediate disqualification of entire IRA plus penalty). Thus, if you invest in an active business, you must be cautious when engaging in transactions that could be considered self-dealing or result in a direct or indirect personal benefit. Whenever you consider a complex transaction, it is important you consult with a qualified expert.

Let’s conclude with a few comments on the tax consequences of investing in an active business. If you purchase shares, and sell them for a capital gain, the profit flows in to your retirement account as any other investment – tax free to a ROTH or tax deferred in a traditional IRA. Likewise, if you lend money to a business, the interest earned passes up to your retirement account tax preferred.

If you invest in a joint venture, mutual fund, or partnership, such that you receive distributions of profits or income, rather than capital gains, your tax picture becomes more complex. Obviously, the IRS won’t let these profits go in to your retirement completely untaxed.

In other words, when you invest in a business by purchasing shares, the value of those shares go up or down based on the net income of the business. The business is earning money, paying corporate tax on its net profits, and then distributing out any after tax gains as dividends or stock appreciation. Thus, the IRS gets its cut first, then the investors benefit.

When a business operates as a partnership, untaxed net profits flow through to its members on Form K-1 to be taxed on the partner level rather than the partnership / entity level. If a retirement account were allowed to receive flow-through profits, then it would be possible to defer or eliminate tax on those profits all together.

Note: It is not possible to operate a business in the U.S. untaxed, but it is possible offshore.

To prevent this, the IRS invented “Unrelated Business Income Tax” or UBIT. In essence, UBIT is a tax at the corporate rate of 35% on profits in a retirement account on income which is not related to the accounts primary purpose of investing.  Income from an active business that is not capital gains, but ordinary income, mean the IRA is operating a business and are thus these profits are UBI and taxed at 35%.

So long as you can live with the tax consequences, your IRA may invest in partnerships, LLCs, and mutual funds (but not S-Corps). To prevent a reporting mess at the IRA level, you should form a U.S. UBIT Blocker corporation, make the investment and pay the tax from that entity, and pass through “related” income or investment returns to the retirement account.

If you invest in an offshore business, which is not taxable in the United States, then you can eliminate UBIT entirely by forming an offshore UBIT Blocker. This is where IRA tax law gets really interesting.

Let’s say you want to invest in a business partnership in Panama, will own 30% of that structure, and operating profits will be passed to you without being taxed by that country. If you form an offshore IRA LLC, an offshore UBIT Blocker corporation, and make the investment from this corporation, you can eliminate UBIT.

This is because the active business profits are earned by an offshore UBIT Blocker are free from corporate level tax. If that entity were a U.S. corporation, its profits would be taxed at 35%. Because it is an offshore corporation, formed in a country with no corporate tax (such as Belize or Nevis), no tax is due.

The UBIT Blocker now passes up these profits to the LLC as dividends. Because dividends are not unrelated income, but rather investment returns, they are not taxable…and UBIT has been effectively blocked.

To be clear, I am referring to an IRA making an investment in to a business that is outside of the United States, has no US source income, and is generating active business returns with an office and staff based in Panama. I am not taking about an offshore structure investing in a business or partnership located in the United States, or a business based in America that is utilizing a foreign holding company.

I hope you have found this article interesting. If you have questions on forming U.S. or offshore IRA LLCs and/or UBIT Blocker structures, please contact me at I will be happy to work with you to design a structure that maximizes privacy and protection while still in compliance with IRS retirement account regulations.


UBIT Blocker

Eliminate Tax on Leverage in your IRA with UBIT Blocker

If you want to use leverage / margin to increase your IRA’s investing power, then you need an offshore UBIT Blocker Corporation. There are major benefits available for the sophisticated investor offshore, and the most important is the ability to use leverage and avoiding US tax on that leverage.

Without a blocker, you will pay US tax on the profits generated by the loans in your retirement account. This is called Unrelated Business Income Tax, or UBIT for short, and can be a real killer at 35%. UBIT is taxed at the corporate rate and the United States has the highest nominal corporate tax in any of the world’s developed economies. There is no (long term) capital gains treatment available for UBI.

For example, if you want use your IRA to purchase a rental property in Belize, a local bank will give you a non-recourse loan for up to 50% of the value. So, your $50,000 IRA can purchase a $100,000 property…which sounds great. Well, if you are not structured properly, 50% of the net profits from the rental, and 50% of the gains when the property is sold, are attributed to leverage and thus UBIT. This means that half of your profits are taxable in the United States at 35%.

The same is true with leveraged brokerage accounts. Sophisticated investors might wish to trade their IRAs with 10 times leverage in the FX or commodities markets, but UBIT tax is so high that it makes the leverage worthless.

These investors can form an offshore IRA LLC, an offshore corporation as a UBIT Blocker, open a trading account onshore or offshore, and eliminate UBIT on leverage. A properly structured UBIT Blocker corporation will completely eliminate US tax on leverage!

For more information on UBIT and blocker corporations, please check out my Self Directed page. For further reading, here are a couple outside links:

Please contact me directly at for a confidential consultation on the use and benefits of offshore UBIT structures. I will be happy to answer your questions and assist you in taking your retirement account offshore.

Offshore IRA

Is Your IRA Confiscation Proof?

Are you thinking of using your IRA to invest abroad? Do you want to move your retirement account out of the United States? There are two very different ways to accomplish these goals. First, you can use a simple self-directed IRA and allow your custodian to make whatever investments you need. Second, you can take control over your account by forming an offshore IRA LLC.

With a self-directed IRA, you can direct the custodian where to invest your money, but you don’t control the transaction. If your custodian is experienced in offshore deals, he will probably do as instructed. If he is not comfortable with a situation, then he can refuse to make the transfer.

With an offshore IRA LLC, you have complete control over your retirement account. Your custodian makes only one transfer…in to your offshore IRA LLC. From there, you are responsible for all transactions.

If your objective is to make a variety of investments, hold property in an offshore LLC, and gain complete control over your retirement account, then you need an offshore IRA LLC.

If you are making one investment, especially in to foreign real estate, then you might be satisfied with a self-directed IRA.

For small retirement accounts, or those with very few investments, the costs of an IRA LLC might outweigh the benefits. For example, a $40,000 account might be sufficient to buy in to a development in Belize, but you may not be willing to pay $3,000 to fully structure the transaction. Therefore, economics can dictate the investment be made in a self-directed IRA without the benefit of an LLC.

If your IRA is $150,000, you wish to purchase properties in various countries and invest the balance in stocks and bonds through an offshore brokerage, then an offshore IRA LLC is required. It is unlikely that a self-directed custodian will agree to handle multiple complex transactions, and he certainly will not allow you to trade your own funds in an offshore brokerage.

In other words, a self-directed IRA custodian will need to handle each and every trade, investment, and transaction, and he will charge you for each. If you have an active investment account, these fees will probably eat you out of house and home right quick.

By utilizing an offshore IRA LLC, you eliminate these transaction costs. The custodian makes only one investment – in to your IRA LLC.

The offshore IRA LLC also gives you complete control over your investments. If you are concerned with the US government taking over your retirement account, then you need an offshore IRA LLC.

  • There is approximately $18 trillion in US retirement accounts and the national debt is nearly $17 trillion and rising. Food for thought…

When you make an investment using a self-directed account, it is the custodian who is making that acquisition on behalf of your retirement account. If an order comes through demanding the funds be returned to the US for any reason, then your custodian will be forced to liquidate the investments for whatever he can get and pay over to Uncle Sam. As the signor on all accounts and investments, he will have the authority and ability to comply with such an order.

As I said above, if you have an offshore IRA LLC, the custodian invests in to that entity and you take it from there. This means that all investments and accounts are held in the name of your LLC and you are the only signor on these accounts and transactions. The custodian can request that you return the assets to his control, but it would be impossible for him to compel you to do so.

To put it another way, it would be impossible for the Custodian to go in to court in Belize and gain access to your bank or brokerage accounts there because he is not a signor to the accounts and has no power over them. He would have no standing or right to sue you or your LLC in a foreign country as his authority is limited to US retirement accounts and transactions where he is a signor.

  • This protection only applies to offshore IRA LLCs. If you are using a US LLC, rather than an offshore IRA LLC, and hold accounts the US, then the US government can simply issue a levy. The same is true of accounts and assets held in Canada, France and the UK. For more information on government takings, see: Can the Government Seize My IRA?

The above example is carrying things to the extreme and assumes you are willing to ignore the demand of the custodian to return your funds to his control. A more practical benefit of the offshore IRA LLC is that it creates a level of impossibility or impracticability in forcing the return of IRA assets. The US government, in its infinite wisdom, may decide to grandfather in these offshore IRA LLCs and block all future formations.

In fact, most experts, providers and IRA custodians agree on only one thing: that the offshore IRA LLC is not long for this world. This structure gives the average person to much control over his or her (possibly only) significant asset and allows them to move it out of the reach of Uncle Sam much too easily. If and when the US government decides to come after retirement accounts, their first attack will be against the offshore IRA LLC.

When this happens, those who have formed and funded their offshore structures will likely be left alone. The stigma and difficulty of going after a number of retirees will generate way to much fear and bad press. Can you imagine trying to criminalize and force the sale of foreign real estate? That would be very ugly.

Far more likely is that existing offshore IRA LLCs will be left alone and grandfathered in to a new law or rule. Forming and funding new offshore IRA LLCs will become an impermissible distribution that is taxable and a penalty will be imposed. Such a change would probably not even rate a blip on the national news cycle.

And this can be accomplished with a very simple change: investing in a single member entity / LLC can be added to the list of impermissible transactions (collectables, life insurance, businesses of which you own more than 50% or are a highly paid employee, etc.). Alternatively, managing an offshore IRA LLC can be deemed to be operating a business, and you own 100% of that business, so it is improper. Either way, future transfers to offshore IRA LLCs can be eliminated with the stroke of a pen, no act of congress, vote, or other law need be passed.

Therefore, the best and only way to ensure you are allowed to control your own finances, and make your retirement account confiscation proof, is to place it in to an offshore IRA LLC and invest outside of the United States before the tides change. By holding accounts at banks that have no branches in the US, in physical gold, foreign real estate, and in other assets not easily seized, you have the best protection available.

If you found this information helpful, I suggest you also read my article on Self Directed and Offshore IRAs. This is more detailed and focused on the legal requirements of these structures.

If you have any questions, please contact me at or at (619) 483-1708 for a confidential consultation.

Solo 401k for Expats

Solo 401k Retirement Plans for Expats

I am often asked if an Expat can invest in a retirement plan. The simple answer is yes, there are retirement plans for Expats. Yes, if you are living and working offshore, you can use a retirement plan to reduce your taxes. Yes, the Expat can use a Solo 401k plan to save on taxes!

The US government treats all of its citizens the same. It doesn’t matter whether you are living in Panama City, Florida, or Panama City, Panama. So long as you carry a US passport, Uncle Sam wants his cut. Because you are taxed the same, Expats have access to all of the same deductions and tax savings plans as do people living in the US.

If you are living and working abroad, your first line of defense against the US tax man is the Foreign Earned Income Exclusion. With the FEIE, you can exclude up to $97,600 in 2013 of salary or business income from Federal income tax. This is the major tax advantage of living offshore…and the platform on which all other benefits, such as operating your business through an offshore corporation, are founded.

That is to say, if you are self-employed, or running a small business, and you qualify for the Foreign Earned Income Exclusion, you should be utilizing a foreign corporation. I have covered how to do this in great detail in various postings, so I won’t belabor the point here. For more information, see: Eliminate US Tax in 5 Steps with an Offshore Corporation.

Well, what can you do if your business has net profits in excess of FEIE, which is $97,600 (single) or $195,200 if a husband and wife are both working in the business? You can elect to retain the balance in to your corporation and defer US tax until you take it out. Though, you will pay US tax on all capital gains and interest income earned on those retained earnings.

A better solution might be to place that money in a US qualified retirement plan. When you put money in a retirement plan, you get the same benefits as someone working in the good old U.S. of A. You can select a traditional plan and take a tax deduction when you pay in, or setup a ROTH and pay no tax when you take the money is distributed to you.

Note: The Expat also gets to take a standard deduction, or all of the same itemized deductions as someone living in the US…including mortgage interest. You should only consider a retirement plan if your net income exceeds the FEIE and your allowed deductions. For example, it is unlikely that a retirement plan will be worthwhile for someone netting $110,000 from his or her business.

The best retirement plan vehicle for most self-employed Expats is the Solo 401(k). Qualified Expat small business owners can contribute much more on an annual basis than you can to a typical Individual Retirement Accounts, and even than to other small business plans such as the Simplified Employee Pension Individual Retirement Accounts. Also, with a Solo 401(k) you also have the option of making either tax-deferred (traditional) or tax-exempt (Roth) contributions.

  • For the high net worth individual, who wants to put away more than, say $50,000 per year, a defined benefit plan may be required.
  • For the very sophisticated entrepreneur, with up to $1.2 million to in excess profits, an offshore captive insurance company might be in order.

Solo 401(k) Retirement Plans for Expats

Your offshore corporation can establish a Solo 401(k) plan, provided that the only eligible plan participants are you (the business owner) and your U.S. spouse (if you have one). Generally this means you won’t be able to set up a Solo 401(k) if you have other U.S. employees. If you have US employees, you might consider segmenting them in to their own entity or converting them to independent contractors.

  • If those employees are offshore, converting them to independent contractors means you will need to provide IBCs for them so they are not caught in the web of paying self-employment tax.

Remember that this article is for the entrepreneur who is living and working abroad, qualifies for the Foreign Earned Income Exclusion, and is operating through an offshore IBC. As such, you have a lot more flexibility than someone living and working in the United States.

Contributing to a Solo 401(k) Plan

Similar to other 401(k) plans, Solo 401(k) plans allow contributions in the following ways:

  1. An employee contribution of up to $17,500 if younger than age 50, or $23,000 if age 50 or above in 2013
  2. An employer (or profit-sharing) contribution of:
    1. Up to 25% of net adjusted business profits for those not required to pay self-employment tax
    2. Up to 20% of net adjusted business profits for those who are required to pay self-employment tax

As an expat entrepreneurs, your salary is designated as the profit-sharing contribution. The maximum annual total limit for both types of contributions is $51,000, or $56,500 if age 50 or over for tax year 2013.

U.S. Tax Implications

Pretax option: Qualified contributions (employee and profit sharing) can be deducted from U.S. taxable earned income at the time of contribution. These contributions then grow on a tax-deferred basis until you begin to withdraw them after age 59½, at which time they will be taxed as ordinary income at your future U.S. marginal tax rate.

After-tax (Roth) option: If your 401(k) plan documents allow it, the employee contribution portion can also be made on an after-tax (nondeductible) basis, and contributed to a separate Roth 401(k) account that will growth free of U.S. tax. (Note that profit-sharing or employer contributions, which are not mandatory, cannot be made to Roth options at this time.)

Whether it’s better for you to make pretax or Roth contributions to a 401(k) plan will depend on your personal situation. If your taxable AGI will increase in future years, then you want to focus on Roth contributions. If your effective tax rate will decrease in the future (after retirement), then you want to focus on traditional plans.

Yes, it is possible for the Expat’s effective tax rate to increase after retirement. If most of your income was excluded by the FEIE, your effective rate might be near zero. After retirement, you might begin selling stocks, taking distributions, etc., all of which is taxable in the US. Therefore, an Expat’s effective tax rate will often rise after retirement.

Special Consideration for Expats: Unexcluded Earned Income Requirement

Note that your Solo 401(k) contribution must be made with unexcluded earned income (such as wages or self-employment income). If you either have no earned income or if you’re excluding all earned income from U.S. tax using the Foreign Earned Income Exclusion, you cannot contribute to a Solo 401(k).

This is one of the reasons I stated above that you should only consider a retirement plan if your income exceeds the Foreign Earned Income Exclusion. Another is that it makes no sense to lock money in to a retirement account if you can take it as salary tax free.

If you’re currently excluding all of your earned income using FEIE, but you could receive similar benefits by using the Foreign Tax Credit, rather than the FEIE, it could make sense to revoke using FEIE in order to contribute to a Solo 401(k) plan. In other words, if you pay a lot of local tax on your salary in the country you live, you may find that switching to using the foreign tax credit won’t leave you worse off in terms of U.S. tax and will allow you to invest in a Solo 401(k).

Note: If you make this switch and then change your mind within five years, you’ll need to apply for IRS approval to resume using FEIE by requesting a ruling from the IRS.


Solo 401(k)s can be a great way for a U.S. expat with an income from an offshore corporation of $200,000+ per person (husband and wife) to save money each year in a U.S. tax-advantaged account without locking that money in to their corporation as retained earnings.

Remember that retained earnings in an offshore corporation are usually distributed out as a non-qualified dividends. This means that these distributions will be taxed as ordinary income. You may be able to defer US tax for many years, but once you take out these profits, the tax hit will be significant.

I also note that passive income made by your offshore corporation will likely be taxable as earned. While a retirement account allows you to defer such tax, or pay zero capital gains (Roth), an offshore corporation usually has no such preferred tax status.

As you can see, there are a number of issues to consider when creating a retirement account and an offshore tax and business structure. If you are thinking about moving you and your business offshore, contact me at for a free confidential consultation. I will be happy to work with you to develop a plan that will reduce your worldwide tax burden.

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finance real estate overseas

US Tax Breaks for Offshore Real Estate

Do you own property outside of the United States? Are you thinking about investing in offshore real estate? Are you an offshore real estate mogul looking to reduce or eliminate your US taxes? This article will cover all areas of US taxation of offshore real estate and provide insider tips and techniques to get your US tax bill under control.

So long as you carry a US passport, the IRS wants you pay tax when you sell offshore real estate. US citizens are taxed on their worldwide income and there are very few offshore tax breaks for capital gains and the passive income. Thus, it doesn’t matter whether you are living in the good ‘ole U S of A or abroad, passive income and capital gains are taxable as earned.

  • Active investors, real estate professionals, and those who buy in a retirement account are exceptions to the rule.

This means that offshore real estate is taxed the same as domestic real estate (with the exception of depreciation). The same tax rates apply, the same deductions for expenses are allowed, and the same credits are available. I will describe the best of these below.

In most cases, if buy a property in Panama and sell it after 3 years, you have a long term capital gain in the US, and owe tax at 20% to 23.8%. For the rest of this article, I will assume a long term US rate of 20%.

Offshore Real Estate and the Foreign Tax Credit

This doesn’t mean you must pay double tax, first in the country where the property is located and then again in the United States. The IRS allows you to deduct or take a dollar for dollar credit for any taxes paid to a foreign country…for every dollar paid to Panama your US bill should go down by one dollar. In practice, this never works out perfectly, but it does eliminate most double tax.

For example, let’s say you bought a property in Medellin, Colombia in 2005 for $100,000. In 2013, you received an offer you couldn’t refuse for $150,000, giving you a capital gain of $50,000. The capital gains tax rate in Colombia is 33%, so you pay $16,500 to Colombia.

The capital gains rate of Colombia is significantly higher than the United States at 20%, so you should not expect to pay any tax to the US. You will report the sale on Schedule D of your US personal return and deduct or take a credit for the $16,500 paid on Form 1116, leaving nothing for the IRS to leach on to.

Now let’s say you sell a property in Panama, where capital gains are taxed at 10%. In this case, you will pay 10% to Panama ($5,000) and 10% to the United States ($5,000), to get to the US 20% rate for long term capital gains.

If you had this same transaction in Argentina, Ecuador or Costa Rica, where real estate sales are not taxed, you will pay all of the “available” 20% to the United States.

Important Note: When deciding in which country to buy real estate, that country’s capital gains rate only comes in to play if it exceeds the US rate. If a country’s capital gains rate is 0% to 20%, you will pay 20% in total. If a country’s rate is more than 20%, then only the excess should be considered in your decision. For example, you are paying a 13% tax premium to buy property in Colombia because Colombia’s rate is 13% higher than the US’s capital gains rate.

Many clients look at a country like Costa Rica and think they are getting a deal or saving money by paying no capital gains tax when they sell their property. Well, these countries have other taxes and duties to make up for their zero capital gains rate, which might not deductible on your US return. In most cases, you are better off buying property in a country whose system mirrors that of the United States.

Cut Out the Tax Man – Offshore Real Estate in Your IRA

The exception to the rule above is offshore real estate held in an IRA LLC. By purchasing offshore real estate in your retirement account, you can defer or eliminate US tax on both rental profits and capital gains. If the country where your property is located doesn’t tax the sale, then you just might avoid the tax man all together. If the country taxes you at a relatively low rate, such as Panama at 10%, this might be the only tax you pay (ie. the IRA cut your total tax bill by half).

Let me explain: If you move your IRA or other type of retirement account away from your current custodian and in to an Offshore LLC, you can invest that account in foreign real estate. The LLC is owned by your retirement account and holds investments on behalf of that account. You buy the rental property in the name of the LLC, pay operating expenses from the LLC, and profits flow back in to the LLC and in to your retirement account.

I note that this structure is for investment or rental real estate and not property you want to occupy. If you later decide to live in the property, it must first be distributed out of the retirement account to you and taxes paid if applicable.

If you wish to purchase offshore real estate with funds from your IRA and a non-recourse loan, or you are in the active business of real estate, you can add a specially structured offshore corporation to eliminate US tax.

If you buy real estate with an IRA in the United States, you get the joy of paying tax on the gain attributed to the money you borrow (the mortgage). If 50% of the purchase price comes from your 401-K and 50% from a loan, half of the rental profits and half of the gain is taxable, with the other half flowing in to your retirement account.

Take this same transaction offshore and no US tax is due. Tax free leverage in a retirement account is one of the great offshore loopholes. Please check out this article for more information.

Offshore Real Estate and Depreciation

Owners of rental real estate in the United States get to utilize accelerated depreciation and deduct the value of the property over 27.5 years. If the property is offshore, you must use straight-line depreciation over 40 years and you get less bang for your depreciation buck.

On a $100,000 rental property, your annual depreciation deduction would be about $3,636 for US situated property vs. $2,500 if located outside the country. This means you would be paying a premium of $1,136 offshore real estate.

Don’t get to excited and cancel your offshore real estate deals just yet! The benefit of depreciation can be fool’s gold. The accelerated depreciation is great if you plan to hold the property for 20 years. However, if you plan on buying, improving and selling over a short period (a few years), then accelerated depreciation will cost you money, not save you money.

This is because depreciation is “recaptured” when you sell the property. Every dollar you were allowed to deduct over the years prior must be paid back, is added to your basis, and taxed at 25% rather than 20%. So, as a rough example, if you have a gain of $50,000, and took depreciation of $20,000, you owe tax at 20% of $50,000 for $10,000 plus 25% of $20,000 for $5,000. Therefore, you total tax due is $15,000.

The more depreciation you take, the more you must repay. If you hold a property for many years, taking a deduction today, and paying it back in the distant future, is a benefit. If you will sell the property in 3 or 5 years, taking the deduction now, and paying an additional 5% in tax later, is of little to no benefit.

I have had several clients over the years shocked at the size of their tax bills from the sale of a rental property. They had planned for a 15% rate (the previous long term rate), and ended up at 20% + recapture. In States like California, where values property values have gone down, it is possible to sell a rental at a loss and still have a big time tax bill from recapture.

This might lead some to think a good strategy is to not take depreciation, especially on property you plan to flip ASAP. Well, the IRS has a surprise for you: The tax law requires depreciation recapture to be calculated on depreciation that was “allowed or allowable” (Internal Revenue Code section 1250(b)(3)). This means you will pay tax on depreciation whether you take it or not.

All of this is to say that not being allowed accelerated depreciation on offshore real estate might be a good thing.

$250,000 / $500,000 Exclusion and Offshore Real Estate

As I said to begin this article, all of the same US tax rules apply to offshore real estate that apply to onshore properties. This holds true for the primary residence exclusion: If you qualify, you can exclude up to $250,000 single or $500,000 married filing joint, from the sale of your primary residence.

To qualify, you must own and occupy the home as your principal residence for at least two years before you sell it. Your “home” can be a house, apartment, condominium, stock-cooperative, or mobile home fixed to land anywhere in the world.

Tax Tip: You can take the $250,000/$500,000 exclusion any number of times. But you may not use it more than once every two years.

Have you owned and been renting out a property in Panama for a few years? You might consider kicking out those renters, moving to Panama, and occupying the property for two years before you sell.

Did you convert a home from your primary residence to a rental property? The rule is that you must have lived in the property for 2 of the last 5 years to qualify for the exclusion. Therefore, you can live in it for two years, rent it out for up to 3 years, and then sell and get the full exclusion.

To get the $500,000 exclusion, both a husband and wife must live in the home as their primary residence. It is possible for one spouse to qualify while the other does not. For example, husband is living in the United States and visiting his wife and family in Panama. On a joint return, only the wife may take the exclusion for $250,000 when they sell the home in Panama.

You don’t need to spend every minute in your home for it to be your principal residence. Short absences are permitted—for example, you can take a two month vacation and count that time as use. However, long absences are not permitted. For example, a professor who is away from home for a whole year while on sabbatical cannot count that year as use for purposes of the exclusion.

You can only have one principal residence at a time. If you have a home in California and a condo in Panama, the property you use the majority of the time during the year will be your principal residence for that year. So, it would be possible for Panama to be your primary resident for one year and California to be your primary residence the next. Before you sell, make sure you have spent at least 2 of the last 5 years in the property.

Like-Kind / 1031 Exchange with Foreign Property

Because you get the “benefit” of all US tax rules when it comes to offshore real estate, you can use like-kind exchanges (also called a Section 1031 exchange) to defer US tax. The only caveat is that you can’t exchange US property for foreign property – it must be a foreign property for foreign property transfer.

In a like-kind exchange, you defer paying taxes by swapping your property for a similar property owned by someone else. The property you receive is treated as if it were a continuation of the property you gave up. The benefit is that you defer paying taxes on any profit you would have received.

You may only exchange property for other similar property, called like-kind property by the IRS. Like-kind properties must have the same nature or character, even if they differ in grade or quality. All real estate owned for investment or business use in the United States is considered to be like kind with all other such real estate in the United States, no matter the type or location. For example, an apartment building in New York is like kind to an office building in California.

All real estate owned for investment or business use outside of the United States is considered to be like kind with all other such real estate outside of the United States. Therefore, you can exchange an office building in Panama City, Panama for an apartment building in Medellin, Colombia. You may not exchange a property in Panama with a property in New York.

In practice, it’s rare for two people to want to swap their properties with each other…especially offshore, where only US persons benefit from this loophole. Instead, one of the owners usually wants cash and the other (the gringo) wants to avoid tax on his gain. In this case, you can still qualify for a like-kind exchange by adding a licensed third party specialist to the deal, called a qualified intermediary or QI.

Let’s say your property in Panama is worth $300,000, and you have a capital gain of $100,000. You can defer paying tax on this sale if you can find someone in Colombia who wants to swap. Of course, no Colombian wants any part of a US 1031 exchange because they get no benefit…only an American living in Medellin would find the tax deal interesting. So, after you identify the property you want in Colombia, you need to hire a QI.

Essentially, the QI buys the property in Colombia and then enters in to a like-kind exchange with you. So long as you can identify the replacement property within 45 days after you sell the Panama property, and your replacement property purchase is completed within 180 days, you have a qualified 1031 exchange. Because of these time limits, it’s a good idea to have a replacement property lined up before you sell your property.

You should also note that this tax strategy is only advantageous in countries with low capital gains rates. If the country has a tax rate equal to or higher than the US, there is no reason to enter in to an exchange. It will not reduce your tax in the country where the property is located, only in the United States. If the Foreign Tax Credit will eliminate your US tax obligation, then an exchange is pointless.

By swapping a property in Panama with a property in Colombia, you are deferring US tax on 10% of the gain. This is because you pay 10% to Panama and nothing at this time to the United States. When you sell the property in Colombia, there is no reason to enter in to a like-kind exchange – unless you want to defer the gain from Panama a second time. The tax rate in Colombia is higher than in the United States, so no tax will be due to Uncle Sam on the gain from that property.

  • Let’s say you had a gain of $100,000 on the property you sold in Panama in 2011 and you will have another gain of $50,000 when you sell the property in Colombia in 2016 (very good for you by the way).
  • When you sold the property in Panama, you paid 10% to Panama and transferred the gain to the property in Colombia for US tax purposes.
  • When you sell the property in Colombia in 2016, you will pay 33% on the $50,000 to Colombia, leaving nothing for the US on this portion of the transaction.
  • You will also recognize the deferred capital gain on $100,000 from the Panama property. You already paid 10% to Panama, so you will pay 10% ($10,000) to the US in 2016 from the sale of the Panama property in 2011.

All of this planning and structuring allowed you to defer a 10% US capital gain for 5 years.

Combo Deal: Yes, you can combine a 1031 exchange with the $250,000 primary residence exclusion. To qualify for both, you must hold the property for more than five years and live in it for at least two of those five years. Then, you can use the exclusion to reduce or eliminate the capital gains, including tax carry-over from a like-kind exchange.

Offshore Rental Properties

Rental income and expense from offshore real estate is reported on your personal return, Schedule E, just as a US rental property would be. You must keep US quality books and records, including all expenses from management, improvements, repairs, and taxes paid. You must follow all US tax rules for these deductions and expenses, such as depreciating improvements and deducting repairs.

The IRS has a right to audit you offshore real estate, so be ready. It may be common to pay your bills in cash in Colombia, but you will have a tough time deducting any expenses without a receipt and proof of payment (such as a cancelled check).

An area of emphasis in an audit of offshore real estate is travel and other expenses associated with visiting the property. If you are flying to Panama five times a year, hanging out for a week, and then expensing these trips against your one rental unit on Schedule E, the deduction will not survive an audit. In fact, it is likely to be the cause of an IRS investigation.

I generally advise clients that they may visit their rental properties once a year for a couple of days. If they have no other business abroad, and are not using the getaway as a vacation, the entire trip may be deductible. If you have a large portfolio abroad, then you might get away with spending more time traveling, but one trip per year is a safe deduction.

When reporting your rental property, remember to take depreciation. As stated above, the only difference in offshore real estate is the allowed depreciation method. You must utilize straight-line depreciation over 40 years.

US Tax Filing Obligations for Offshore Real Estate

Your offshore real estate comes with a number of new and exciting US tax forms to file. It is important you master these forms or hire someone experienced in there preparation. Failure to file, or filing late, can result in outrageously high penalties.

  • These draconian penalties are aimed at Americans hiding money offshore. Unfortunately, regular folks, with simple offshore investments, often get caught in the crossfire.

The most critical offshore tax form is the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1, referred to as the FBAR. Anyone who is a signor or beneficial owner of a foreign bank or brokerage account with a value of more than $10,000 must disclose their account(s) to the U.S. Treasury.

For example, if you opened an offshore bank account to receive rent payments, and that account has more than $10,000 in it on any given day, then you must file an FBAR. If you send the funds to buy the property in to your offshore account, and then on to escrow, you must file this form. If you wired money from your US bank account directly in to escrow (which is a bank account you do not control), then the FBAR is not required.

The law imposes a civil penalty for failing to disclosing an offshore bank account of up to $25,000 or the greatest of 50% of the balance in the account at the time of the violation or $100,000. Criminal penalties for willful failure to file an FBAR can also apply in certain situations. Note that these penalties can be imposed for each year.

In addition to filing the FBAR, the offshore account must be disclosed on your personal income tax return, Form 1040, Schedule B.

Other international tax filing obligations for offshore real estate include:

  • If your property is held in a foreign corporation, you must file Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations.
  • If you hold your offshore real estate in a foreign LLC, you may need to file Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities.
  • If your property is held in an international trust, a Panamanian foundation, or a Mexican Fideicomiso, you may need to file Form 3520-A – Annual Information Return of Foreign Trust and possibly Form 3520 – Annual Return to Report Transactions With Foreign Trusts.
  • If your foreign assets are significant, you must file Form 8938 – Statement of Foreign Financial Assets was new for tax year 2011. The filing requirements (who must file) for this form are too complex to list here, so please see the instructions before filing.

The Offshore Real Estate Professional

If you are living and working abroad and in the business of real estate, you can realize some great tax benefits. The following section is for those who spend a significant amount of time and effort working their offshore properties, and not those with only one or two apartment units.

The typical investor in offshore real estate may only deduct his losses against other passive income. If you do not have any other passive income, losses are carried forward until you can use them.

An exception to this rule applies to a) active participants and b) material participants in the management of offshore real estate.

As an active participant in offshore real estate, you can deduct up to $25,000 of passive losses against other income (like wages, self-employment, interest, and dividends) on your US tax return.  This allowance is phased out on a 50% ratio if your adjusted gross income is $100,000 or more.

As an active participant, you must share in the management, financial and operational decisions of the property and be knowledgeable in the day to day issues (usually by reviewing financial statements and other documents produced by the manager). This means you should be responsible for arranging for others to provide services like repairs, collect rents, etc. You may have a paid manager for the property and still be considered an active participant, so long as you manage that manager.

Besides the need to qualify as an active participant you must also meet these additional requirements:

  • You must own more than 10% of the property.
  • You cannot be a limited partner…you must be a general partner.
  • You must be an active participant in the year of the loss and the year that the loss is deducted. For example, if you are a passive investor in 2012, and active in 2013, you can’t deduct a loss from 2012 on your 2012 or 2013 return (because the 2012 loss was carried forward).

If you are a material participant in offshore real estate, you are much more involved and in control than an active participant. As a material participant (sometimes referred to as a real estate professional), you are in the active business of real estate and may deduct your expenses against any and all of your other income, without limitation or AGI phase-out.

It is relatively easy to qualify as an active participant. It is far more challenging to be classified as a material participant in offshore real estate. If you can meet the criterion, you will find that there are major international tax breaks and loopholes available to the real estate professional.

NOTE: The major benefit of being offshore and material participant / real estate professional is that you may draw a salary from an offshore corporation and qualify for the Foreign Earned Income Exclusion. This tax break is only available to offshore professionals and not those living or working in the United States.

To be classified as a material participant or real estate professional you must be active year-round in the operation of your offshore real estate business. You must work on a regular, continuous, and substantial basis, and offshore real estate should be your primary occupation. If you work a full time job and do real estate on the side, you are probably not a real estate professional.

According to the IRS, you materially participate in offshore real estate:

  • If (based on all of the facts and circumstances) you participate in the activity on a regular, continuous, and substantial basis during the year; or
  • If you participate in the activity for more than 500 hours during the year.

To meet the facts and circumstances test, offshore real estate should be your principal trade or business and you must have significant knowledge and expertise in that industry.

You can prove your level of involvement to meet the 500 hour test by any reasonable means. This includes calendars, appointment books, or narrative summaries identifying work performed and hours spent. Contemporaneous daily time reports or logs aren’t required but it is your responsibility to prove you meet the test, so any evidence you can muster will be a benefit. This is to say that the burden of proof is on you to demonstrate you qualify as a real estate professional.

In order to materially participate in offshore real estate, you should be living and working abroad. It would be near impossible to qualify as materially involved in properties in Colombia while living Texas. Therefore, you should also plan to qualify for the Foreign Earned Income Exclusion (FEIE). When the FEIE is combined with an eligible offshore real estate business, you can take out up to $97,600 in salary from that enterprise free of Federal income tax and make use of a number of other tax mitigation strategies.

In other words, a qualified offshore real estate professional can deduct his or her expenses against all other income, regardless of source and without limitation based on his or her AGI, and draw out up to $97,600 in profits free of Federal income tax. If a husband and wife both qualify as material participants and for the FEIE, they can each take out a salary of $97,600, for a total of $195,200 of tax free money.

To qualify for the FEIE, you must be out of the US for 330 out of 365 days or a resident of another country. If you are a resident of another country, preferably where your properties are located, then you can spend up to 4 months in the US each year.

The 330 day test is quite simple: you are either out of the US or you are not. The 365 days need not be in a calendar year (for example, May 2013 to May 2014 is fine) and there is no requirement to file for residency or spend a certain amount of time in particular country.

The residency test is more challenging. You must be a resident for a calendar year and move to a particular country with the intention of making that your home for the foreseeable future. You must submit a residency application to that country, file taxes, and generally become a member of the community.

The 330 day test is based on travel days and the residency test involves your intentions to move to a particular country and make that your home. It is always easier to prove how many days you are in the US. To put it another way, it can be a challenge to prove your “intent,” especially if your needs or intent changes after only a year or two.

For this reason, I suggest you qualify under the 330 day test in your first year abroad and then move to the residency test. This is the safest way to deal with the possibility of changes in circumstances.

If your offshore real estate business is focused in one country, you can obtain residency in that nation after a year and utilize the residency test to qualify for the FEIE. Utilizing the residency test in the long run is the best way to ensure you receive the benefits of the FEIE while being classified as a real estate professional.

If your offshore real estate business spans many countries, and you are on the road several months of the year, then you may need to utilize the 330 day test in year two and beyond. You may not be able to put down roots in one country, or you might not want to become a tax resident of any nation. In this case, you will need to watch your travel days to and from the US closely. If you miss the 330 days, even by one day, you lose the FEIE in its entirety and pay US tax on 100% of your salary.

If you qualify for the FEIE, you must operate your offshore real estate business through a foreign corporation. In order to minimize worldwide tax, you might consider a holding company in a jurisdiction that will not tax your income and subsidiaries in each country you do business to transact on behalf of your properties.

Whatever your structure, and wherever you decide to setup shop, you must incorporate outside of the United States. If you decide to skip this step, you will pay US self-employment tax on the salary. Even though you might pay nothing in Federal income tax, you will pay around $15,000 per person in SE tax. US SE tax is eliminated completely by the use of a properly structured foreign corporation.

The FEIE allows you to take out up to $195,200 (joint) free of Federal income tax, and a foreign corporation eradicates US SE tax. What if your profits are significantly more than $195,200?  You can retain earnings in to your foreign corporation to be taken out as salary subject to the FEIE in future years or as dividends whenever you choose. Withdraws that qualify as salary under the FEIE, are taken out tax free. If they come out as dividends, they are tax deferred for as long as you see fit to maintain the corporation…which can be decades, even if the business has long since been shuttered.

If you are able to combine material participation / active business status with the Foreign Earned Income Exclusion, and do so through a foreign corporation, you might just operate your offshore real estate business free of any and all US tax and keep Uncle Sam out of your pocket entirely. But, this is a major endeavor and one you should not take lightly.

You must be ready to defend your position in an audit and keep US quality books and records to support both positions. To succeed in an audit of your active business status, keep extensive files, to-do lists, home and mobile phone records, business plans, project descriptions and instructions to employees documenting your active involvement in day-to-day activities of the business.

In order to prove your FEIE, keep track of travel to and from the United States and have your credit card and other records available to support you claims of days out of the country. If you will use the residency test, file for residency and, if possible, a work permit. Also, file a tax return in your country of residence and put down as many roots in to that community as possible. You may be able to structure your affairs in such a way as you pay very little in tax to this country, but you should file a return.


The world of offshore real estate investing can be a complex maze of US tax compliance, deductions, credits and exclusions. If you are a professional, or you’re considering starting an offshore real estate business, you will need a solid plan to minimize your worldwide tax obligations. Such a plan must take in to account your US requirements and those of the country(s) where your property is located.

I can assist you by forming basic holding companies for the passive investor, creating a custom plan for the professional, placing your cash and properties behind appropriate barriers for asset protection, and keeping all of these constructs in US tax compliance.

Feel free to phone me at (619) 483-1708 or by email to with any questions and a confidential consultation.

December 2019 Update – we no longer offer 1031 exchange servies. I am not aware of any global firm that supports these transactions.

Offshore IRA Fees

Tax Benefits of Going Offshore

The United States tax code is a hopelessly complex mess with as many loopholes for the wealthy as there are stars in the sky. There are many tax benefits of going offshore, and some of them can great for the “regular guy.”

Multinational corporations and billionaires spend big money on political campaigns and on lobbyists to ensure their interests are protected, and they expect a strong return on these “investments.” For example, a 2009 study found that each dollar put toward lobbying translated into $6 to $20 of tax benefits. Searching through these negotiated tax breaks leads you to a list of tax benefits of going offshore.

Just how ridiculous has the US tax code gotten? According to the IRS, taxpayers spent more than six billion hours in 2011 complying with the tax code – that’s enough to create an annual workforce of 3.4 million people. If that workforce was a city, it would be the third largest city in the United States. If that workforce was a company, it would employ more individuals than Walmart, IBM, and McDonalds, combined.

Even the mighty IRS seems overwhelmed by the complexity of the current tax laws. According to the National Taxpayer Advocate – part of the Internal Revenue Service – the Service cannot meet the needs of taxpayers.

Of the 115 million phone calls the IRS received in fiscal year 2012, it was only able to answer (actually pick-up) 68 percent of the calls. The IRS also failed to respond to almost half of all taxpayer letters within the agency’s own established time frame. And in 2011, the U.S.  Treasury Inspector General’s reported to Congress that most taxpayers who contact the IRS do not receive helpful responses.

Such complexity means that the well informed and well represented have a major advantage over the average citizen. While billionaires can afford hundreds of thousands of dollars a year in legal fees to structure their affairs to minimize tax, diversify their investments, and protect their assets, the average citizen is at a major disadvantage.

With this in mind, I spend my time researching and writing on the various ways the average person might utilize the tools designed for the Googles and Mitt Romneys of the world for their benefit. It is my hope that my website and articles will level the playing field just a bit.

Tax Benefits of Going Offshore

In the world of international tax planning, there are many regulations that can be utilized by anyone living, working, or investing abroad, to reduce your US tax bill. Some will eliminate tax on your salary, or allow you to opt out of the Social Security and Medicare taxes, while others, such as those that apply to IRA LLCs, can allow you to invest in just about anything offshore, with leverage, tax free.

The information provided below on the tax benefits of going offshore is a brief summary of a variety of complex tax rules. It is not meant as a complete analysis of these laws, nor is it tax or legal advice specific to your situation. Please contact me at or at (619) 483-1708 to discuss your situation in detail.

Foreign Earned Income Exclusion

The key to many of the offshore tax benefits of going offshore is the Foreign Earned Income Exclusion. This section of the tax code allows you to earn up to $97,600 from work, either as a self-employed person or as an employee. To qualify, you must be out of the US for 330 out of 365 days or a qualified resident of another country.

Anyone living and working abroad can qualify for this exclusion, so long as you meet the requirements of the 330 day test or the residency test, you are golden. The exclusion applies to Federal Income Tax, and not Self Employment tax, so additional planning may be required if you are running your own show.

I note that only those living in low tax countries will get much play from this exclusion. If you are based in a place with a tax rate that is about the same, or even higher, than the United States, then the Foreign Tax Credit will step in and prevent double taxation, without the need for the FEIE.

In other words, if your US Federal tax rate is 35%, and your rate in France is 40%, you have no need of the FEIE because you are already paying more in tax than you would in the United States. You can deduct your French tax on your US tax return without concerning yourself with qualifying for the FEIE.

Conversely, if you are living tax fee in Panama, drawing a salary of $100,000, and fail to qualify for the FEIE, then 100% of your income is taxable in the United States. Without the FEIE, there is no benefit to working abroad in a low tax country!

Take Your Retirement Account Offshore

By moving your IRA or other retirement account in to an offshore LLC, you can take control over your savings, invest in foreign real estate or projects, and hold cash outside of the United States in any currency you like. Even better, you can do all of this while maintaining the tax free or tax deferred status these accounts enjoy.

For the sophisticated investor, the tax benefits of going offshore can be enormous! I will list the in order of importance.

First, if your IRA invests in certain hedge funds (typically, the most profitable ones), the income generated is probably taxable to your IRA at the prevailing corporate tax rate, which is currently 15% to 39%. Most investors will pay about 34% on taxable income earned in their retirement account. In addition, you must file IRS Form 990-T to report that income and pay the tax.

–        Note that only very specific types of income, known as Unrelated Business Income (UBI), is taxable in a retirement account. This tax is called UBIT.

By moving your IRA in to an offshore LLC, and investing through a UBIT Blocker Corporation, you can completely eliminate UBIT. Your IRA can invest in a hedge fund, or any other UBI generating venture, and pay zero US tax.

This tax loophole was created for large pension funds, but is available to any tax exempt organization or charity, including offshore IRA LLCs. Hedge funds that wish to attract pension funds, retirement accounts, or non-US investors, must set up an offshore module of their fund (known as a Master/Feeder structure), whereby the tax exempt groups (your IRA) and foreign persons invest in the offshore division, while US persons invest in the US division. Then, these groups are combined in the master fund, from which investments are made and returns generated.

Offshore IRA LLCs have been used by the uber rich for years, and became big news during the previous presidential election. Many news outlets reported that Mr. Romney was able to grow his IRA LLC to over $100 million through the use of this type of 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.

Likewise, IRA LLCs that wish to invest in an active business will benefit from being offshore. Your IRA LLC can own up to 50% of any active business. The profits generated, especially if that business is structured as a partnership, are often Unrelated Business Income and taxable to the IRA.

If the company is offshore, then it may be operating free of US income tax. If you buy in through a specially designed offshore IRA LLC, profits paid out to you may also be tax free because your offshore structure effectively blocks the US from taxing those profits. For additional information, see the UBIT Blocker section of my website.

Those are the basics of taking your IRA offshore…child’s play, if you will. Here is the monster tax benefit of going offshore: You can eliminate UBIT on leverage by going offshore. Let me explain.

When you borrow money, or leverage up your IRA, the profits generated from that leverage are taxable (under the UBIT rules). So, if you buy a rental property for $100,000 with your IRA, paying $50,000 from your retirement account and get a non-recourse loan of $50,000 for the balance, when you receive rental payments, or sell the home, 50% of the net income will be taxable as UBI.

The same is true with brokerage and forex accounts. Your provider may be willing to give you 10 to 1, 30 to 1 or even 100 to 1 leverage on your deposit. But, if this is an onshore retirement account, the profits generated with that leverage are taxable.

By taking these transactions offshore, through a specialized offshore IRA LLC with UBIT Blocker Corporation, you can eliminate UBIT on borrowing and leverage. Tax free leverage is the key to generating big tax free profits in your retirement account.

For the “asset protection” benefits of moving your retirement account offshore, see my article: Can the Government Seize my IRA? If you are concerned with privacy or protecting your IRA from creditors and government appropriation, moving your IRA offshore, and in to a bank that does not have a branch in the US, is your best and only defense.

Stop Paying Social Taxes

Are you tired of supporting the Obamanation through social and medical taxes? Or, forgetting the political hyperbole, do you want to cut your US taxes? You can opt out of employment and social taxes by moving offshore. If you qualify for the Foreign Earned Income Exclusion, and are an employee of a company based outside of the US, then you need not pay Social Security, Medicare, or any other social taxes on your salary.

However, if you are an independent contractor, or are otherwise self-employed, then you must still pay Self Employment tax, at a rate of around 15%. So, assuming you qualify for the FEIE, on a salary of $97,000 you pay no Federal Income Tax but around $14,000 in SE tax. For a husband and wife, each drawing a salary, the SE tax will doubled to about $28,000.

The same is true if you are an employee of a US corporation while living abroad. You get the benefit of the FEIE, but must pay your share of social taxes (about 7.5%), as must your employer. All Social Security, Medicare, Obamacare, and related taxes still apply to the Expat and his employer, so long as you are employed by a US company.

Like the employee of a foreign company, you can eliminate SE tax by incorporating your business offshore and become an employee of that company. You can incorporate in any tax free country (such as Belize), and it does not matter where you are living or working, it does not matter if you are the owner and sole employee, nor does it matter if all of your clients are in the United States. So long you are living and working abroad, qualify for the FEIE, and are running an active business, you can eliminate SE tax by incorporating offshore. Your corporation should bill your clients and you can draw a salary from the net profits that entity of up to the FEIE amount (currently $97,600).

–        You might combine the offshore company with a US LLC if you wish to open accounts in the US and get paid by check, PayPal, or credit card.

Defer Tax with Offshore Mutual Funds

For the uninitiated, investing in an offshore mutual is a bad idea. Punitive rules (the opposite of loopholes) have been written in to the tax code by the US mutual fund industry which are quite hostile to investing in these types of products offshore.

In most cases, an offshore mutual fund investment is governed by the Passive Foreign Investment Company (PFIC) section of the code. Like a US mutual fund, you only pay tax when you cash out. But, unlike a US fund, the tax man is going to crush your profits. First, when tax is paid, all income and gains are taxed at the highest ordinary income rate (presently 39.6%).  There is no long-term capital gains treatment.  Second, losses are disallowed.  Third, you have to assume that all of the gains are earned ratably over the time the investment was held — even if the fund lost money the first few years and only made its gains in the last year when you cashed out.   Why is that bad?  Because of the final part of the quadruple whammy – interest charges, compounded annually.  Annually compounded interest at the underpayment interest rate (which is set by the Treasury Department each quarter and has been anywhere from 5% to 10% over the last several years) is charged on deferred tax.

And here is the loophole for the offshore professional: If the PFIC meets certain accounting and reporting requirements, a PFIC shareholder can elect to treat the PFIC as a qualified electing fund.  The effect is that the PFIC shares are taxed like U.S. shares.  The owner of a foreign mutual fund treated as a QEF may: 1) elect to pay tax on income as it is accrued in your account, or 2) choose to defer tax until money is received. If both the QEF and deferral elections are made, you pay tax on the profits plus 3% interest per year when you receive a distribution.

If your offshore mutual fund is returning profits greater than your interest rate of 3%, or the fund has profits some years and losses in others, the QEF with deferral elections are major tax benefits. This is especially important for a fund with losses, as these losses do not flow through to your tax return, so deferral can eliminate some quite harsh tax consequences of going offshore.

These elections allow the well-educated investor to access some of the high flying offshore mutual funds without the punitive taxes meant to keep the uninformed in the United States.

Eliminate Tax in Your Country of Residence

While the United States taxes you on your worldwide income, no matter where you live, and no matter where your clients are located, most countries do not charge you for foreign source income…which is to say, you pay no tax on income earned outside of their borders or, the majority of nations tax you only on income earned within their territory.

With this in mind, planning may eliminate tax from your country of residence. For example, if you are living in Panama, selling products or services to customers in the United States, and operating a through corporation in Belize, Panama may not tax you on the net profits of that Belize entity. Conversely, if you are living and working in Panama, operating through a Panama corporation and/or selling to people living in Panama, then Panama wants its cut.

By incorporating your business in a country other than where you reside, you may be able to legally avoid paying any tax to that country. When you combine a tax free country of incorporation (Belize), with a country with a territorial tax system (Panama), and the Foreign Earned Income Exclusion, it is possible to earn a significant amount of money from your business and pay zero income tax to any nation.

In the case of a business with employees and local expenses, you may form a corporation in Panama and bill your Belize corporation from that Panamanian entity. You should only bring in enough money to Panama to pay your bills, but draw your salary from the Belize company. In this way, the Panama company will break-even and no tax will be due.

I am often asked why countries like Panama allow this setup. It is because 1) you will pay employment and other taxes on your employees, and 2) you will spend money and indirectly contribute to the economy by living and basing your business in that country. A business that employees local workers is a major benefit to any efficiently run economy.

Retain Earnings Offshore

For the entrepreneur, qualifying for the FEIE and taking that salary through an offshore corporation is the first line of defense against the IRS. It allows you to take out $97,600 in salary free of Federal Income Tax. If a husband and wife are both involved in the day to day operation of the business, each may qualify for the exclusion, resulting in up to $195,200 in tax free salary.

So, what if your net profit is more than FEIE? If you take more than the Exclusion out of the corporation, you will pay tax on it as earned. If you leave it in the corporation, it will be classified as retained earnings and not taxable in the United States until it is distributed as a dividend or other payment.

–        This assumes you are incorporated in a country, such as Belize, that will not tax your corporate profits or retained earnings.

Two important caveats: 1) interest or capital gains derived from these retained earnings is taxable as earned, and 2) you may not borrow retained earnings from your corporation or use them for your personal benefit. They must remain in the corporation or be used for business expenses and expansion.

You might be wondering why large companies based in the US get offshore exclusions while you must make the drastic step of moving abroad to receive these benefits? In fact, multinationals must follow similar rules to qualify by having an active division with employees outside of the US in order to retain some earnings offshore.

To put it another way, a small business, that is owned and controlled by a US person, must move all of its operations outside of the US to gain these benefits. A large corporation can achieve the same by moving an autonomous division abroad.

For additional information on this topic, see my article: How to Manage Retained Earnings in an Offshore Corporation.


As you can see, there are a number of tax benefits for those offshore. If you are living, working, and/or investing abroad, you should consult with a professional to ensure you are taking advantage of these benefits. For the business owner who has a non-US partner, additional incentives may be available but are outside of the scope of this article.

I will end by pointing out that big tax breaks come with big tax reporting requirements. US tax compliance should be a primary component for anyone considering going abroad and is the foundation of an international tax or business strategy. Be sure to contact a licensed US representative, and do not rely on a foreign provider, whenever incorporating offshore.

Seize my IRA

Can the Government Seize my IRA?

One of the most common questions I get is, “can the government seize my IRA?”

With all of the uncertainty in the USA, and the growing hostility towards our government and its practices, many Americans are concerned about their retirement accounts. For most, their retirement account is their only liquid asset, the majority of their savings, and probably their largest holding, after their home. Just about every day I am asked, “Can the US seize my IRA account and, if so, what can I do to protect it?”

I hate to be an alarmist, so I usually try to calm the fears of these concerned citizens by saying the government can seize your IRA, but they probably won’t. This is the best I can offer because there are many examples of the US government seizing bank accounts, real estate and other properties, and yes – retirement accounts. The government can and does seize these accounts all the time and court action or oversight is not required. In fact, I would bet that the US government seizes several IRA accounts every day.

Let me explain how the government can seize your IRA: Most think their retirement accounts are protected…and some are, from civil creditors under your State’s applicable law. How much is protected depends on your State and the type of claim brought against you.

Level 1: There are Federal ERISA laws that protect some accounts, but not all.

Examples of ERISA-qualified pension and benefit plans include:

  •  401(K) accounts
  • pension and profit-sharing plans
  • group health and life insurance plans
  • dental and vision plans, and
  • HRAs, HSAs, and accidental death or disability benefits.

If your retirement account is not covered by ERISA, and you live in California, then a judgment creditor may be able to get to it.*

Level 2: Some of the most popular retirement accounts are not covered by ERISA.

Types of non-ERISA accounts that may be vulnerable include:

  • IRAs, Roth IRAs and SIMPLE IRAs
  • SEP and Keogh Plans
  • 403(b) plans for employees of a public school or university
  • plans that do not benefit employees, or “employer-only” plans, and
  • government or church plans

* Each State has its own laws. The example above is from California and may not apply to you.

The above applies only to civil creditors. None of these accounts are protected from the Federal government going after unpaid taxes or a spouse or child seeking back support with a domestic relation order in hand (called a “QDRO”).

While a spouse or child must go to court and get a judgment, the IRS needs no such approval. Any IRS agent assigned to collect from you can issue a letter to your bank and IRA custodian to seize 100% of your assets up to the amount they claim you owe. No court or other oversight is required and no formal process is required. The agent need only hit a few keys on his computer and your money is gone.

The same is true for those charged with a crime. The government can step in and seize all of your assets and hold them until the case has run its course. This includes real estate, cash, bank and retirement accounts, and automobiles. If you win your case, you will get these back…of course, you have no money to pay a decent attorney, but who cares?

The Feds can also seize your property if it is used by someone else in the commission of a crime. In 2012, Pot Shops were big business in California. Various counties and the State passed laws that allowed for medical marijuana use and sale with a prescription. Well, these dispensaries were usually rented from building owners by the operators. The Federal Government, not big fans of California’s tomfoolery, sent letters to the owners of these properties saying the Feds would seize their buildings, regardless of State or local law, if they continued to rent to these modern hippies. Building owners complied and the industry was largely shut down.

If you have read this far, you may be wondering why I am rambling on about tax cheats, criminals and potheads. It is because these are current examples of the Feds taking from its citizenry without judicial oversight or new laws being passed. How difficult would it be for the government to demand all retirement accounts be placed under Federal control, or at least force them to be held in a central depository? I guarantee it is easier than finding a legitimate way to solve America’s spending problem.

There are historic examples, and international instances, of government takings. It was not so long ago that the tiny island of Cyprus, on the insistence of the EU, took a significant portion of the money held in its banks to pay down its debts. Of course, we assume this will never happen in America…just as we assume our government was not spying on us and operates with only good intentions.

In the good ole’ USA, we can look back to 1933 when the Federal Government seized all gold and gold certificates by Presidential Order 2039. There was no need to pass a new law or special process to protect the citizenry. It was deemed to be in the best interest of the masses, so it was done.

This taking was sold to the public as being for their own good. The Feds claimed that “hoarding” of gold was stalling economic growth and making the depression worse. Why not hording of retirement assets by the “rich?”

As it turned out, it was just a money grab – prior to the taking, the price of gold was fixed at $20.67 per ounce. After the gold had been rounded up, the Fed raised the price to $35 an ounce, resulting in an immediate loss for everyone who had been forced to surrender their gold. The profit funded the Exchange Stabilization Fund established by the Gold Reserve Act in 1934.

So, I ask you this: When you look at the current state of the US, the economic situation of the average voter, and the unprecedented attack on the “rich,” do you think there would be a major revolt if the Government seized all retirement accounts over, say, $50,000 or $100,000?

You do have one option to protect your nest egg. You can move it in to an offshore IRA LLC with an account at an international bank outside of the reach of any type of US creditor. Such a structure is compliant with all current US rules and you will maintain the tax free (ROTH) or tax deferred (traditional IRA, etc.) nature of your retirement account.

The only caveat is that you need to be careful where in incorporate and where you bank. The US IRS can seize assets in Canada, France and the UK without notice and without legal proceedings. They can also levy any bank account at any institution with a branch in the United States.

For example, if you buy real estate in France, the IRS can seize it to satisfy back taxes. If you take your IRA to Panama, but make the mistake of depositing it in to HSBC, the IRS can levy that account by issuing a notice to HSBC New York. These are not hypothetical…I have personally handled cases of this type around the world and know these things to be true.

For detailed information on moving your IRA or other retirement account offshore, please see: Moving Your Retirement Account Offshore with a Self Directed IRA LLC. If you are concerned about protecting your retirement, I suggest you take action now. It is imperative that you have your affairs settled prior to the end of the year and the implementation of the Foreign Account Tax Compliance Act. For information on this law, see the Deloitte website.

So, can the government seize your IRA? The answer is yes. Now, what will you do to protect it?

2013 Retirement Account Limits

2013 Retirement Account Limits

There was a lot of bad news at the end of last year thanks to the fiscal cliff, but there were also a few bright spots. One of these rays of light shined on your 2013 retirement account limits in the form of increased contribution amounts. Most of your maximum contribution limits increased, as did the Foreign Earned Income Exclusion.

IRA Contribution (Traditional and Roth) have increased: (For age 49 and younger) $5,500 (for age 50 and higher) $6,500

SEP IRA Limits

(For age 49 and younger) $51,000 (for age 50 and higher) $56,500


(For age 49 and younger) $12,000 (for age 50 and higher) $14,500

IRA Contribution Limits if you are also covered by a retirement plan at work

(married filing jointly, others see IRS chart)

  • If you earn $95,000 or less – you may make a full IRA contribution
  • If you earn $95,001 to $114,999 your allowable contribution phases out.
  • If you earn $115,000 and over you may not also contribute to an IRA

Roth IRA Contribution Limits:

(married filing jointly, others see IRS chart)

  • If you earn $178,000 or less – You may make a full Roth IRA Contribution
  • If you earn $178,000 to $188,000 you allowable Roth Contribution phases out
  • If you earn over $188,000 you may not make a Roth IRA Contribution

Solo 401(k)

As the employee: For you and your spouse up to 100% of earned income to a max of $17,500 each.

From Profit Sharing: 20% of Adjusted Net Business Profits up to $51,000 or $56,500 (Depending on your age). This is an excellent tool for the self-employed expat earning more than the Foreign Earned Income Exclusion and will be the subject of future articles.

With higher taxes in 2013, and your Foreign Earned Income Exclusion being crushed by a weak dollar, these new maximum contribution limits are more important than ever.

Convert to a Roth 401k

Fiscal Cliff Tax Break for Your 401(k)

Good news for the millions of Americans with 401(k) plans – you can convert to a Roth 401(k) at any time. Buried in the Fiscal Cliff bill was a big break – you can now convert your 401(k), 403(b) and other defined contribution plans to a Roth at any time.

In previous years, you could convert your 401(k) to a Roth only if you changed jobs, retired, or turned 59 ½. Now, you can convert to a Roth at any time on the same terms as an IRA. In other words, 401(k)s and IRAs are on a level playing field when converting to Roth tax status.

The tax differences between a 401(k) and a Roth 401(k) are simple enough. With a traditional 401(k) you deduct contributions as they are made and pay taxes when you take distributions (tax deferred). With a Roth 401(k) you do not get a deduction when you make the contribution and your 401(k) grows tax free (tax exempt). Note that tax free principal and growth in a Roth 401(k) still requires that the funds be invested for at least 5 years and can’t be withdrawn until you reach age 59½.

The other major differences between a 401(k) and a Roth 401(k) are the contribution levels. For 2013, those under 50 can contribute $17,000 and those 50 and over can contribute $22,500 to a 401(k). The most you can place in a Roth 401(k) is $5,000 if you are under 50 and $6,000 if you are 50+. Additionally, Roth IRA contributions are prohibited when taxpayers earn a Modified Adjusted Gross Income of more than $110,000, ($160,000 for married filing jointly). For other issues, such as catch-up contributions, click here for the IRS website.

Employers are permitted to make matching contributions on their employees’ designated Roth 401(k). However, these contributions do not receive the Roth tax treatment. The matching contributions are allocated to a pre-tax account, just as matching contributions to a traditional 401(k). So, employer contributions are tax deferred, not tax exempt.

Here are a few other considerations when converting to a Roth 401(k):

  • Roth 401(k) contributions are irrevocable. Once money is invested into a Roth 401(k) account, it cannot be moved to a traditional 401(k) account. This means there are no mulligans when you convert to a Roth 401(k). The Fiscal Cliff legislation does not allow for an in-plan recharacterization – the ability to undue the conversion. If you convert and lose your job, or the bottom falls out of the market, you are stuck paying the taxes.
  • Employees may roll their Roth 401(k) contributions over to a Roth IRA account upon changing jobs or retiring.
  • Not all employers offer the Roth 401(k). Many smaller companies may feel that the added administrative burden is just too costly.
  • Unlike Roth IRAs, owners of Roth 401(k) accounts must begin distributions upon reaching age 70 ½, similar to required minimum distributions for IRA and other retirement plans.

So, now that you can convert, should you? For a related article, please see my comments on why Expats should convert to a Roth ASAP. I note this was written in 2012 when tax rates were guaranteed to go up (5% short term capital gains increase, etc.).

A Roth 401(k) plan will probably be most advantageous to those who might otherwise choose a Roth IRA – for example, younger workers who are currently taxed in a lower tax bracket, but expect to be taxed in a higher bracket upon reaching retirement age. Higher-income workers near the Roth IRA income limits may prefer a traditional 401(k).

Another consideration is your views on the future of income tax rates in the U.S. If you believe taxes will continue to rise, then paying taxes now through a Roth 401(k) may be preferred. If you are an optimist, and hope tax rates will go down, then deferring taxation through a traditional 401(k) might be your bet. As I wrote in 2012, if you believe tax rates will go up, then convert to a Roth ASAP.

The same holds true for your investment methodology. If you are in “preservation” mode, holding U.S. treasuries and following the recommendations of your broker, then the tax free growth of a Roth 401(k) is of little benefit. If, on the other hand, you are actively diversifying out of the United States, using offshore self-directed LLCs and related strategies to grow your wealth, and investing with an eye towards maximum growth, a Roth 401(k) may result is significant tax savings in the long run.

Here are some of the other situations where a Roth conversion may make sense:

  • You want to leave a tax-free inheritance to your heirs, regardless of the cost, or your tax rate is significantly lower than your beneficiaries.
  • You are at the lower end of the tax-rate scale now and will likely be at a much higher tax-rate during retirement.
  • You have enough deductions and tax credits to offset the tax bill that would be due on the Roth conversion.
  • When will you need to access your retirement money? If very soon, say in the next 8 to 10 years, then a Roth conversion may not make sense.
  • Can you afford to pay the taxes on the conversion? If you are under age 59 ½ and need to take money from your retirement account to pay the taxes, it almost never makes sense to convert. If you are over 59 ½, and the 10% penalty will not apply, then payment of taxes from your retirement account may be advisable.

In conclusion, I note that the optimal strategy may include both Roth and traditional accounts. This will give you the most flexibility when navigating the sea of tax law changes in the years to come. For example, you might be able to avoid increased taxation of your Social Security benefits, or increased Medicare premiums and Obama-care costs by using tax-free Roth withdrawals to keep taxable income below a given threshold.