International Investments through Offshore Retirement Accounts

Offshore Shelf Company
Christian Reeves

The Real Costs of Your 401K Revealed

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401(k) Fees Revealed – Get Ready for a Shock!

If you have a 401(k) account with a U.S. broker, you are about to get the shock of your life. When you receive your next quarterly statement, probably between Sept. 30 and Nov. 15, do not open it without taking precautions!

I suggest you take the envelope over to the sofa and sit down, remove any sharp objects, or anything which could be thrown against the wall in anger, take a deep breath, and then open it. You are sure to find a whole host of fees and expenses that you have been paying all along and had no idea. You will now learn exactly why you have lost money, or why your returns were less than stellar, and how much of that was due to hidden fees charged by the broker who was working so diligently on your behalf.

Why the new disclosures? For the first time since Congress laid the groundwork enabling these plans in 1974, all of your fees must be disclosed. Previously, these statements showed investment returns after fees were deducted, but did not show the fees themselves — probably leading you to believe that your investments weren’t returning as much as they actually were.

Now, because of new government regulations, you’ll be able to see how your investments have done before fees are deducted because actual returns and costs will be displayed in separate columns. You will have a clear picture of how your investments did and how much was taken out for management, in transaction fees, etc.

Ok, you just found out that you have been grabbing your ankles for a very long time. What can you do with this information? If you have a 401(k) with your current employer, you may be out of luck. You can storm in to your HR department and demand that they find a firm with more reasonable fees. Enough of the local broker who buys dinner and drinks for HR guy! If they refuse, you have little recourse.

If you have a 401(k), or any other type of retirement account, with a former employer you can take over control, eliminate 90% of the fees, and make your own investment choices by moving it in to a Checkbook LLC. You simply form a U.S. LLC or international LLC and transfer the retirement account from your current provider in to that entity.

Note that the law requires your retirement account have a licensed agent involved. Thus, there will be a U.S. administrator and minor fees with the LLC. However, the administrator will not be involved in your investment decisions and he will not take a piece each time you make a trade. His primary role in the Checkbook LLC is to handle annual reporting to the IRS. You tell him how your investments did at the end of the year and he reports to the government.

You have two choices with the Checkbook LLC. You can use a U.S. LLC and make investments in the United States, or you can use an international LLC and make investments outside of the U.S. of A. With the international LLC, you can hold your funds in any bank or brokerage around the world, in any currency or currencies, and make any investment you see fit.

For example, the international LLC can invest in real estate in Ecuador, have a bank account in Belize, trade currency through a broker in New Zealand, and own gold and other precious metals in a vault in Switzerland. The investment options are unlimited, and the decisions are yours. You will not be required to get the permission of the administrator…you simply write the check (hence the name, Checkbook LLC) or send the wire to complete the transaction.

Of course, there are some basic rules. For example, you must manage the LLC for the benefit of the retirement account.

In other words, you must handle it as an investment account, and not take any money for personal use. You can purchase real estate as an investment, but you cannot live in the property…you must rent it out to an unrelated person at fair market rates.

If you would like checkbook control over your retirement accounts, please contact Premier Offshore Investor at (619) 483-1708, or email info@premieroffshore.com. We will send you a detailed presentation with all the rules, answer any questions, and guide you through the process.

Convert to ROTH
Christian Reeves

Expats – Convert to a Roth ASAP!

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If you qualify for the Foreign Earned Income Exclusion and have a traditional IRA, now is the time to convert that relic to a Roth. Doing so may save you a fortune in taxes, especially if completed in 2012.

The Foreign Earned Income Exclusion (FEIE) allows you, the intrepid Expat, to eliminate up to $95,100 of wage or ordinary income from your 2012 tax return. If you and your spouse are both operating a business, or are wage earners, you might exclude up to $190,200 combined.

To qualify, you must be living and working outside of the U.S. This means you are 1) employed by a corporation (it does not matter if you own that company) and 2) are a resident of a foreign country or are outside of the U.S. for 330 out of any 365 day period.

So, the FEIE takes care of your ordinary income. However, we Expat Americans are still required to pay U.S. tax on our investment and passive income, no matter the source. That means all of the benefits of a retirement account apply and the tax rate and rules for investment income are the same for Expats and residents.

For an Expat, a Roth IRA has numerous tax planning advantages over a traditional IRA. This is because you pay taxes on the front end while you are maximizing the FEIE and you don’t pay taxes when you withdraw funds in retirement. Also, there are no required minimum distributions when you hit retirement age.

A traditional IRA allows you to deduct contributions on your tax return and any earnings grow tax-deferred until you retire. But these deductions may be of little or no value to the Expat whose income is less than $95,000 or $190,000 joint. Also, because of significant capital gains and other passive income, an Expat’s tax rate may be higher in retirement than while working under the FEIE. In that case, converting to a Roth after retirement can be costly.

Converting to a Roth or contributing to a Roth while abroad will allow you to make the most of your itemized deductions. For example, all Americans may deduct mortgage interest (on up to two homes), property tax, medical, etc., or take the standard deduction of $5,800 single and $11,600 joint (tax year 2011). It does not matter if you maintain a home in the U.S. for your family and/or you have a home abroad, all citizens get the same deductions.

If all of your taxable income is being eliminated by the FEIE, you aren’t utilizing your standard deduction or your itemized deductions…you are already paying zero tax, so these deductions provide no added benefit. Converting to a Roth or investing in a Roth under these circumstances may save you tens of thousands of dollars each year.

Let’s run some numbers on the tax cost of converting to a Roth IRA.

One of my tax preparation clients has been living in Cayman Islands for a number of years. He earned a salary from his offshore company, which is incorporated in Panama, of $81,000 in 2012. All of his ordinary wage income is covered by the FEIE, so he pays zero U.S. taxes, and he has about $60,000 in a traditional IRA. His itemized deductions are about $34,000 for 2012, mostly the result of mortgage interest on his home in Cayman.

If this client were to convert his IRA to a Roth in 2012, his total tax bill on $60,000 would be only $2,300. This is because the Foreign Earned Income Exclusion eliminates his salary and he now gets to make use of his $34,000 in itemized deductions.

If this same client, who is married filing joint, had no itemized deductions or Schedule A and took the standard deduction, his IRS bill would be about $8,000.

Note: If this same client wanted to pay zero tax, he could convert some of his IRA to a Roth in 2012, and the balance in 2013 and/or 2014, thereby maximizing his itemized or standard deductions for each year.

If this Caymanian did not qualify for the FEIE, his U.S. tax bill on $81,000 would be about $4,200 (remember, he has significant itemized deductions). If he also converted his IRA to a Roth while paying tax on his salary, his bill would be $18,400. If he had no itemize deductions, his total tax bill, including the conversion, would be $20,500.

So, converting his IRA while qualifying for the FEIE, results in a savings of $16,100 ($18,400 – $2,300) for this client. Each person’s tax situation is different. You should contact a tax professional to determine your possible savings before deciding to convert your IRA to a Roth.

Considering the approaching “financial cliff,” it is safe to assume that U.S. tax rates will increase and deductions will decrease in 2013. Any change to the IRA rules, tax brackets or capital gains rates, may have a significant impact on your net tax due and IRA conversion options. If you qualify for the FEIE, converting from a traditional IRA to a Roth in 2012 rather than 2013 is likely to save some serious cash.

Converting to a Roth is as simple as contacting your provider and telling them you wish to convert. If you would like to move your IRA offshore, or need assistance with your 2012 Expat tax returns, please contact us at info@premieroffshore.com or (619) 483-1708.

IRA Gold
Christian Reeves

$7 Million in Gold but no Estate Plan

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If you have ever attended an offshore conference, you have heard the story of two kings from Mr. Joel Nagel: Elvis Presley, whose estate was decimated by lawyers and the IRS, and Sam Walton, who left nothing but an old pickup for the vultures.

Today I will tell you about Walter Samaszko Jr. of Carson City, Nevada. At the age of 69, Mr. Samaszko passed away in late June of this year. He left over $7 million in gold bars and coins, $165,000 in stocks and bonds, and $12,000 in cash hidden throughout his home, but only $200 in a checking account.

Mr. Samaszko lived in the same small home since the 1960s, where he had taken care of his mother until her death in 1992. He had no close relatives, and, apparently, no close friends (it was about 30 days before his body was discovered). He left no will and no trust. Reports indicate that his estate will go to his first cousin, Arlene Magdanz, who lives in San Rafael, California.

The gold coins and bars had been minted as early as the 1840s and were from a number of countries, including Mexico, England, Austria and South Africa. The estimated value of $7 million is based on the gold weigh alone. It is likely that the collectors’ value will be much higher.

Mr. Samaszko was obviously a hardworking and intelligent man to have amassed such wealth. He also took great precautions against government interference and economic collapse. So, why no estate plan? Why work so hard simply to leave a large portion of the money to a government he clearly feared?

If we assume that the total value of Mr. Samaszko’s estate, including the collectors’ value of coins, is $8 million, here is the government’s cut:

1. Mr. Samaszko is “lucky” to have died in 2012, when the Federal estate tax only applies on amounts over $5 million. A quick calculation estimates Federal estate tax due of $1,008,000. Had he passed away in 2009, Federal estate tax would have been over $2 million.

2. Nevada does not have an estate tax and California, where his heir lives, has no inheritance tax. Had Mr. Samaszko lived in Washington State, his State estate tax would have been about $1 million.

3. There are a number of fees associated with probate (a legal process required when one dies without a living trust), which includes appraisal costs, executor’s fees, filing fees for the court, surety bond fees, legal fees and accountancy fees. Nevada has adopted a statutory fee schedule, but a judge may approve any amount he deems to be reasonable. Based on the particulars of this case, including the fact that there appears to be only one heir and no contest to probate, one might guestimate the estate fees at 4% to 10%, or $320,000 to $800,000.

If additional heirs are located, legal fees are likely to skyrocket.

With planning, Mr. Samaszko could have reduced or eliminated the bulk of these costs. The most basic tool would be a U.S. living trust. This would have controlled the distribution of the estate, may have included charitable contributions, and would have eliminated probate fees of $320,000 to $800,000. A do-it-yourself book costs about $30, and a lawyer may charge a few thousand dollars for a custom plan.

In addition, he could have diversified out of the United States and in to physical or certificate gold and stock investments around the world. The use of an offshore trust, Panama foundation, or offshore company would have maximized his protection and access to international markets. While it is advisable to have some assets at home and within reach, safety and prudence dictate an international plan to protect you and your assets.

There are a number of other U.S. estate planning tools available at little or no cost, but may be of great benefit if they are needed.

Many are available for free on the internet. These are:

1. Durable Power of Attorney: Allows you to designate to access and control your financial assets. It can take effect immediately, or it can “spring” into effect if an event you define triggers its operation, such as incapacitation or unavailability.

2. Prenuptial Agreement: This keeps your property separate from your spouses, and is especially important in second marriages where you may want to leave assets to your children.

3. Health Care Proxy: Also called a durable power of attorney for health care, this document identifies the person you’d like to make medical decisions on your behalf if you become unable to make them yourself.

4. Living Will: An advance health care directive, also known as living will, personal directive, advance directive, or advance decision, is a set of written instructions that a person gives that specify what actions should be taken for their health if they are no longer able to make decisions due to illness or incapacity. The most common directive is when a person wishes no extreme measures or life support equipment be used in their care.

5. HIPAA Release: A Health Insurance Portability and Accountability Act, or HIPAA, release allows medical professionals to discuss your medical condition with your personal representative. Without this form, the hospital may not be able to discuss your care with your representative.

6. Life Insurance: Life insurance allows you to take care of those who depend on you. If you do not have financial responsibilities, you do not need life insurance.

7. Business Succession Plan: If you are self-employed or own a business, and you want the business to continue after retirement or death, a succession plan must be in place. If your children will take over operations, a relatively simple agreement can be drafted. If you will sell some or all of the business, or there are multiple partners, a more robust strategy will be required.

There are two certainties in life: death and taxes. A detailed estate plan is the only guaranteed way to minimize death taxes and can include a number of tools that diversify your investments, maximize privacy, and plant your financial flag in a favorable jurisdiction.

An attorney with Premier Offshore Investor will be happy to discuss your options. Contact us for a confidential consultation at (619) 483-1708 or email info@premieroffshore.com with any questions.

Update: December 19, 2012

The gold coins were eventually valued at $7.5M and the entire estate went to a distant relative via judicial decree. For additional information, checkout CBS News.