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:
- Legal Definitions
- Basic definition of blocker corporations
- IRS Website on UBI returns
- NY Times on Mitt Romney’s use of UBIT Blockers
Please contact me directly at firstname.lastname@example.org 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.