Tag Archive for: ira

IRA Rules Premier
Christian Reeves

IRA Rules and Prohibited Transactions for Offshore IRA LLCs

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When you take your IRA out of the United States and invest it into an offshore IRA LLC, you become the custodian for the account. In this capacity, you’re responsible for following all US IRA rules. Here are the basic IRA rules and prohibited transactions you must watch out for when you operate an offshore IRA LLC.

First, a few comments on the process of taking your IRA offshore. This will give you some background on why these rules apply.

You can move any vested IRA or 401-K out of the United States. Likewise, if you can convert a defined benefit plan into an IRA, you can move that offshore.

The first step in this process is forming an offshore IRA LLC in a zero tax max privacy asset protection country. Most popular are Nevis, Belize, Cook Islands and Seychelles. These are the top asset protection jurisdictions with single member LLC statutes.

With the LLC up and running, we open an offshore bank account in the name of the LLC and your US custodian transfers your cash into that account. You’re the signer on the account and in control of all investments and transactions. Your custodian has no access to the offshore bank account and does not get involved in your investment decisions.

For more on this process, see: Here’s how to take your IRA offshore in 6 steps

As the manager of the LLC, and the person responsible for making investment decisions for the IRA, you’re in total control. You’re basically the investment advisor to the IRA and, as such, must always act in the best interest of the account. That is to say, you’re jobs are to 1) increase the value of the account and 2) protect the account. You are not allowed not to personally benefit from this position.

The two main risk areas for an IRA investment advisor are 1) prohibited transactions and 2) prohibited investments.

Failure to follow these rules can result in your IRA being dissolved and major taxes and penalties being applied. Per the IRS website, “…if an IRA owner or his or her beneficiaries engage in a prohibited transaction in connection with an IRA account at any time during the year, the account stops being an IRA as of the first day of that year. The effect of this is the account is treated as distributing all its assets to the IRA owner at their fair market values on the first day of the year. If the total of those values is more than the basis in the IRA, the IRA owner will have a taxable gain that is includible in his or her income.”

Prohibited Transactions in an Offshore IRA LLC

Generally, a prohibited transaction in an IRA is any improper use of an IRA account by the owner, investment advisor, his or her beneficiary, or any disqualified person. Disqualified persons include you and your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are examples of prohibited transactions with an IRA.

  • Borrowing money from it
  • Selling property to it
  • Using it as security for a loan
  • Buying property for personal use (present or future) with IRA funds

Prohibited Investments in an Offshore IRA LLC

Your offshore IRA LLC is not allowed to invest in life insurance or collectibles. If you get caught buying prohibited investments, the amount invested is considered distributed in the year invested and you may have to pay a 10% additional tax on early distributions.

Here are some examples of collectibles:

  • Artwork,
  • Rugs,
  • Antiques,
  • Metals – with exceptions for certain kinds of bullion,
  • Gems,
  • Stamps,
  • Coins – (but there are exceptions for certain coins),
  • Alcoholic beverages, and
  • Certain other tangible personal property.

For more on gold, see: IRA Gold Rules

The logic behind prohibited investments is similar to that of prohibited transactions. You could buy artwork, rugs, or antiques and display them in your home. You would then be getting a personal benefit from those investments.

I hope you’ve found this article on the basic IRA rules and prohibited transactions you must watch out for when you operate an offshore IRA LLC to be helpful. For assistance in taking your IRA offshore, you can reach me at info@premieroffshore.com or (619) 483-1708. 

take your IRA offshore
Christian Reeves

Take your IRA offshore to invest in ICOs and Bitcoin

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The United States has forced most ICOs out and will launch an all out attack on Bitcoin in 2018. If you want to hold Bitcoin in your IRA, you should first move your retirement account offshore. Here’s how and why to take your IRA offshore and invest in ICOs and Bitcoin in 2018.

In 2017, the US Securities and Exchange Commission ruled that ICOs were investments akin to traditional Initial Public Offerings. This determination means that the SEC has authority over ICOs and that ICOs must follow the same rules as an IPO.

This also means that the legal and compliance costs to issue an ICO are about the same as they are for an IPO. While a boon for lawyers and CPAs, these costs mean that smaller high value, and early stage ICOs will never see the light of day in the United States.

ICOs have two options in 2018: 1) go through several rounds of funding (angel plus 2 or 3 rounds of VC) before going public, or 2) move offshore and don’t market in the United States.

VCs are sure to have stripped out most of the pure “startup value” from these ICOs by the time of the offering. Plus, adding hundreds of thousands of dollars, or even a million or more, to the startup costs, means only the largest ICOs will get to market.

Of course, coming into a deal in the late rounds is safer, but most ICO investors are looking for looking for a clean deal. One of the primary objectives of the ICO model was to avoid the costs and greed of angels and VCs.

The SEC will push early stage ICOs out of the United States in 2018. Look for the best ICOs to be offered in Mexico and offshore in jurisdictions like St. Lucia, Dominica, Cayman, Jersey and Guernsey.

At the same time, the IRS is doing it’s best to push high net worth investors offshore. The Service is planning all out assault on Bitcoin in 2018, with most of the early targets coming from Coinbase. This site will be turning over more than 14,000 clients to the IRS in 2018 and the audits will begin.

Because the best way to eliminate US tax on your Bitcoin trades is to buy in your IRA, a lot of investors are creating digital IRAs. I expect this trend to hold and increase in 2018.

There are two ways to create a digital IRA. You can setup a self directed account in the US with a custodian that allows you to invest in Bitcoin, or you can setup an offshore IRA LLC. With a self directed account, you’re limited to US investments and the account is under the control of the custodian. With an offshore IRA LLC, the account is out of the US and is under your control.

There is one way to protect your IRA from government overreach – move your retirement account offshore and into an offshore IRA LLC. For more on buying Bitcoin in an IRA, see: Protect your IRA by moving it onto the blockchain.

As I said above, to buy crypto in the United States, you need a self directed IRA. To take your retirement account offshore, you need to add an offshore IRA LLC to this self directed account. Your custodian invests your IRA into an LLC incorporated in Belize, Cook Islands, Nevis, or some other tax free jurisdiction, and appoints you as the manager of this LLC.

With a self directed account, your custodian follows your investment instructions, but he or she has the ultimate say on how the account is invested. Most custodians don’t allow for offshore investments in a self directed account because they can’t or won’t do the due diligence necessary to review those transactions.

Because a US custodian can be held liable if your investments go south, they avoid risk. To eliminate this liability, you form an LLC and the custodian transfers funds to that structure. What happens from here is totally up to you. The liability and decision making is transferred from the custodian to you, the account owner, with an offshore IRA LLC.

The steps to take your IRA offshore are as follows:

First, you can only move a vested account offshore. A vested account is usually one from a previous employer. When you change jobs, or retire, your IRA account vests and you can move it to a new custodian… one that allows for the offshore IRA LLC structure.

Once you’re account is with a friendly custodian, we can form your offshore IRA LLC. This is a single member LLC where the member of the LLC is your retirement account. That is to say, the owner of the LLC is your IRA.

  • Note that a husband and wife can use the same LLC. You can move multiple accounts into a single LLC structure.

Next, the LLC appoints you as the manager of the structure. Again, the IRA is the owner of the LLC and you are the manager. In this capacity, you have total control over the bank accounts, crypto wallets, and investments.

Once the LLC and bank accounts are in place, the US custodian transfers the cash from your IRA to the international bank. You generally can’t transfer stocks or other assets offshore (like kind transfers). You should be moving US dollars into an offshore account.

Finally, you move those dollars into an international crypto trading platform. Now you have control over the account and are the investment manager of the LLC. As such, you must follow all US IRA rules and always act in the best interest of the account, just as a professional investment advisor would.

I hope you’ve found this article on taking your IRA offshore to invest in ICOs and Bitcoin to be helpful. For more information on moving your retirement account offshore, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

protect your IRA
Christian Reeves

Protect your IRA by moving it onto the blockchain

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The new “offshore” is in the cloud. The new asset protection tool is the blockchain. The best way to protect your IRA is by moving it onto the blockchain and behind and offshore structure. Get your retirement savings out of the United States, on to the cloud, and out of the reach of creditors before it’s too late.

As of today, you can freely move your IRA and other liquid assets out of the United States and behind the protective wall of an offshore structure. But, don’t expect this freedom to last long. As the tax reduction plans of President Trump come through, these loopholes will close.

The US will likely reduce US taxes and then eliminate the ability to retain earnings offshore. When that happens, all manner of regulations and new reporting requirements will be unleashed on offshore accounts. Only those who are already offshore will be spared.

You should be grandfathered in and not required to report the transfer. Also, you should not be required to pay any exit tax or transfer tax as we see with intellectual property transfers under IRC Section 482.

In most cases, the transfer of intellectual property to an offshore entity is a taxable event. The IP must be valued and tax paid on that fair market value as if you had sold it to the foreign entity. We expect this treatment to apply to all types of property in the near future.

To support this position, I note that the IRS has already ruled that cryptocurrency is property and not cash or a cash equivalent. This is why they can tax each and every sale as a capital gain. For more on this, see: Tax on Bitcoin Transactions.

In fact, the US government is all over cryptocurrency. The IRS is taxing transactions as capital gains. At the same time, the SEC claims Bitcoin is a currency and thus it has the right to regulate ICOs as it does IPOs.

You can expect the government to close the door to IRA transfers in the near future. If you want to get your retirement account on the blockchain and out of harm’s way, you’ll need to act quickly.

So, how do you get your IRA offshore? How can you move your IRA onto the blockchain? That’s easy enough.

The first step is to form an offshore IRA LLC in an offshore jurisdiction that 1) maximizes asset protection and privacy, 2) won’t tax your transactions, and 3) allows for single member LLCs. We need all three of these to build a proper retirement account structure.

As a result, the number of jurisdictions is limited. We usually work in Nevis, Belize, Cook Islands, and Seychelles. After 15 years in the industry, these countries are the most reliable.

Second, you likely need to transfer your IRA to a new US custodian. All IRAs require a US custodian, even those invested in cryptocurrency offshore. And the large custodians don’t want you investing offshore. They make money selling you their funds, so they prohibit international transfers.

Third, once your IRA is with a custodian that allows for international transfers, you instruct them to send a wire transfer to your offshore wallet or to your international bank account. If you will invest only in cryptocurrency, you might only need a wallet. If you want to diversify, you  probably need an offshore bank account.

Fourth, once you have your structure, an agreeable custodian, and your offshore company is funded, we install you as the manager. You’re responsible for writing the checks or sending the transfers. You’re in control of the IRA and the account grows based on your investment choices.

And that’s all you need to get your IRA onto the blockchain and out of the reach of governments and civil creditors. A proper offshore structure, a US custodian, a quality international wallet or trading platform, and the documents required to install you as the manager of the account.

I should point out that buying Bitcoin in your retirement account will allow you to avoid US tax on these transactions. If you buy and sell crypto within a ROTH, the trades are tax free. If within a traditional account, they’re tax deferred – you pay US tax as you take distributions.

However, if you buy using leverage, you may still have a taxable event. Whenever you buy and sell in an IRA with a loan or on margin, the gain attributed to that leverage is taxable at ordinary rates.

You can eliminate this tax if you’re offshore, but not if you’re investing in the United States. Offshore traders can set up a UBIT Blocker in addition to their IRA LLC and eliminate UBI on their cryptocurrency trades. For more on this, see: What is UBIT in an IRA?

UBIT blockers a very advanced IRA tool only available offshore. Only sophisticated investors should deploy these structures.

I hope you’ve found this article on moving your IRA onto the blockchain to be helpful. For more on setting up an offshore IRA, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

take your IRA offshor
Christian Reeves

Here’s how to take your IRA offshore in 6 steps

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In this article I’ll list the steps necessary to take your US retirement account offshore. Whether you’re looking for asset protection, privacy, or investment diversification, here’s how to take your IRA offshore in 6 steps.

Step 1: Determine if your IRA is eligible to go offshore

Before you can move your cash, you must determine which of your retirement accounts are eligible to go offshore. Only accounts that are vested can be moved out of the United States.

A vested account is one that’s under your control. In most cases, an account vests when you leave your employer and take the IRA with you. So, a vested account is typically a retirement account from a previous employer.

It’s possible that a portion of your account with a current employer has vested. If you’ve been working at the same company for 10+ years, you might be able to move a portion of the account offshore. You should speak with HR to see if any of your IRA has vested.

You can also take certain defined benefit plans offshore. If the plan can be converted into an IRA, and in doing so becomes vested, you can move that plan offshore. Eligibility will depend on your defined benefit plan documents. You’ll need to check with your administrator.

Step 2: Move your IRA to a custodian that allows for offshore transfers

Once you know which accounts are eligible to go offshore, you’ll most likely need to move them to a different custodian. Most US firms make money selling you investments. They earn a commission managing your IRA account and don’t want you to move it out from under their control.

There are a few custodians that allow for offshore IRA LLCs. They charge a fixed annual fee of $400 to $600 rather than making money selling investments.

Note that this move must be done as a transfer and not a rollover. If you have multiple accounts, recent changes to the IRS rules make the rollover a problem. However, you can make an unlimited number of transfer of your retirement account (moving it from one custodian to another). Remember that a transfer is not a rollover.

We’ll be happy to introduce you to a custodian that supports offshore accounts.  

Step 3: Setup an offshore IRA LLC owned by the IRA

Once you have an account number at your new custodian you can form an offshore IRA LLC. The owner of this account will be your IRA… not you personally and not the custodian.

For example, if your custodian is Midland IRA, the owner of the IRA LLC might be as follows: “Midland IRA, Inc. FBO John Smith #55-5555555” with  the number representing your account at Midland. FBO = for the benefit of.

The offshore LLC must be formed in a zero tax jurisdiction, one that allows for single member limited liability companies. The single member of your IRA LLC is your IRA account.

We also focus on countries with strong asset protection laws. For this reason, I like the Cook Islands, Nevis and Belize. The final selection will depend on your banking needs and other factors.

If you’re very concerned about asset protection, you might read the following on using the Cook Islands for maximum protection: Protect Your IRA by Converting it into an Offshore Trust

Step 4: Draft a custom operating agreement establishing you as the manager of the offshore IRA LLC

Now we need to establish you (the beneficial owner of the IRA account) as the manager of the offshore IRA LLC. This is done by drafting a custom operating agreement which lists in great detail your rights and responsibilities.

The bottom line is that you must manage the money in the IRA LLC just as a professional investment advisor would. You should make decisions based on what will maximize returns to the IRA… and those decisions should not benefit you personally.

For example, you can’t borrow from the IRA LLC, can’t use it to buy a home to live in it (even if you pay fair market rent), and can’t use the funds to pay personal expenses

Likewise, you can’t guarantee any of the investments of the IRA. This means you can’t guarantee a loan made to your IRA LLC. All loans taken out by the LLC must be non-recourse secured only by IRA money without a personal guarantee from the beneficial owner.

Step 5: Open an offshore bank account for your IRA LLC

Your IRA is sitting with a custodian that allows for offshore investments, your IRA LLC is incorporated in a secure offshore jurisdiction, and you have a detailed operating agreement giving you control of that LLC. Now it’s time to open an offshore bank account.

The bank selected will depend on the size of the account. If you plan to invest in real estate, and will thus maintain a minimum balance in your offshore account, I recommend Caye Bank in Belize. This bank has high fees but low minimum balances. For more, see: http://www.cayebank.bz/

For accounts of $20,000 and up I recommend Capital Security bank in the Cook Islands (https://www.capitalsecuritybank.com).

  • Because CSB does not have branches in the U.S., they have a good handle on FATCA, focus on U.S. clients, and offer a wide range of investment options, I often suggest clients plant their first flag offshore with these banks and then open brokerage accounts or diversify from there.
  • Another benefit of Cook Islands is that you do not need to travel there to open the account. All of the recommendations below require you visit the bank in person.
  • Finally, CSB is unique in that they don’t lend against client funds. See CSB Low Risk Profile.

In Panama, I recommend Banistmo (https://www.banistmo.com/en), Uni Bank (https://www.unibank.com.pa/en/index.html), and Multibank (https://www.multibank.com.pa/en/default.html). I also suggest Banco General (which is our bank), Santander, Banesco,  if you have a local office.

For private vault storage, I recommend Best Safety Boxes in Panama. See http://bestsafetyboxes.com/

For managed accounts over $2m, I recommend Andbanc in Androa or their branch in Panama (http://www.andbanc.com/).

If you prefer a financial advisor and bank in Europe, I recommend Swiss Partners in Geneva. Their website is http://swisspartners-advisors.com. The minimum account size is about $2.5 million.

Step 6: Transfer your IRA cash from the custodian to your offshore bank account

Once you’re account is opened, the custodian will send a wire from their bank to yours. This will move some or all of your cash out of the United States and into an international account that’s under your control.

  • You can chose to move all or a portion of your IRA offshore. You can leave some cash with the custodian if you want to make US investments or are new to international banking and want take it slow.

As the manager of the LLC, and the only signatory to the offshore bank account, all investment decisions rest with you. You’re the only person who can send a wire or write a check… which is why we call this an Offshore Checkbook IRA LLC.

This also means that it’s your responsibility to follow the various rules of IRA management. Here are a few articles you might find useful:

If you have a Defined Benefit Plan that you might want to convert to an IRA, see: Maximum Asset Protection for a Defined Benefit Plan

You will also find that there are many tax benefits for sophisticated IRA investors which are only available offshore. For example, the ability to use a UBIT blocker to eliminate US tax in your IRA from leveraged investments. Also the ability to own a portion of an active business, which is operated outside of the United States, whereby the income from the business flows into your IRA tax free.

Of course the main reasons clients take their retirement accounts offshore is to diversify out of the United States, invest in higher returning opportunities, and protect their assets from civil creditors and uncertain times. These are the core principals of the offshore IRA model and goals we can assist you to achieve.

I hope this article on how to take your IRA offshore in 6 steps has been helpful. For more information, please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist to structure your affairs abroad.

asset protection for defined benefit plan
Christian Reeves

Maximum Asset Protection for a Defined Benefit Plan

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Defined benefit plans are excellent tools to put a lot of pre-tax money away quickly. Because of they don’t have the same contribution limits as IRAs, they allow the business owner to build up savings and reduce taxes efficiently.

Because defined benefit plans build cash quickly, they’re big time targets of lawyers and civil creditors. In this article I’ll show you how to provide maximum asset protection for a defined benefit plan.

The best asset protection for a defined benefit plan is to move it offshore and inside a “trust like” structure. Get it out of the reach of creditors and judges by moving it out of the US and behind the walls of an advanced asset protection structure.

The first step in moving a defined benefit plan is to figure out if it’s eligible to go offshore. In most cases, a plan from a previous employer with a cash value can be protected. If it’s a defined benefit plan from your current employer, and the plan documents allow for a conversion or to be invested abroad, then it too can be placed inside an international asset protection structure.

Sometimes DB plans are in subsidiary companies, or can otherwise be separated from the main business. If this sub can be closed down, the plan might then vest and be eligible to go offshore.

The way you get a defined benefit plan offshore is to convert it into an IRA (either a ROTH or traditional). Then you place that into an offshore IRA LLC. I’ll explain how to do this below. First, you need to find out if your plan can be converted into an IRA.

The bottom line is that you’ll need to ask your plan administrator if your DB plan can be converted into an IRA. They might not know how to take it offshore, but, if they can advise you how to convert it into an IRA, that’s all you need from them.

Assuming you get a positive answer, you need to ask your administrator to convert the defined benefit plan into an IRA.

  • If your administrator says it’s impossible to convert to an IRA, and he’s making money managing your investments, you might seek out a second opinion. I’ve seen many cases where DB plan administrators put their financial well being ahead of their clients.

Once the cash is an IRA, you can move that account or accounts from your current custodian to one that allows for foreign structures and investments. Not all IRA custodians allow for offshore LLCs and international investments. This is a very specialized area.

Now you can finally get the defined benefit plan offshore. We setup an offshore IRA LLC, open an international bank account, and the custodian transfers the money into this structure. As the manager of the LLC, you will have checkbook control of the account. You’ll make all transfers and be responsible for all investment decisions.

All of the above gets you basic offshore asset protection of your defined benefit plan. If you want maximum protection, we can customize your LLC with features you would normally find in an offshore asset protection trust.

You can’t put an IRA or defined benefit plan into a trust, but we can create an LLC that acts like a trust.

The way we do this is by forming the IRA LLC in the Cook Islands, the top offshore asset protection trust jurisdiction. We then build an LLC operating agreement molded after a Cook Islands asset protection trust.

For example, an offshore trust uses an independent trustee, a protector, and has clauses that make it impossible for the trustee to make payments to creditors. Even if one gets a judgement against you in the United States, there’s no way for them to collect on it in the Cook Islands.

To copy these protection elements, we install an independent LLC manager in the Cook Islands LLC. We also set up a protector who takes over should you (the beneficial owner, similar to a settlor) comes under duress.

To support these professional advisors, the LLC operating agreement includes terms that prohibit the manager from transferring money to the custodian or owner if they’re under duress. The agreement basically creates the defense of impossibility in the Cook Islands to protect the assets of the LLC.

I should point out here that setting up this maximum asset protection structure for a defined benefit plan means that you must also follow the same rules that apply to international trusts. For example, rules around fraudulent conveyance.

In its most basic form, a fraudulent conveyance is when you send money out of the United States to keep it away from a current or reasonably anticipated creditor. If you injure someone today and fund an offshore trust or IRA LLC tomorrow, you’ve probably fraudulently conveyed money into the structure.

Thus, your defined benefit plan must be moved offshore well before you have any legal problems. In a perfect world, it is moved offshore 1 or 2 years before a dispute arises. That is, 1 or 2 years before the harm occurs, not before the plaintiff files a claim against you.

I hope you’ve found this article on how to max protect your defined benefit plan by moving it offshore to be helpful. For more information, please send me an email at info@premieroffshore.com or call us at (619) 483-1708. 

move your IRA offshore
Christian Reeves

How to move your IRA offshore in 2017

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If you’re looking to diversify your account out of the US, protect your savings offshore, or purchase foreign real estate, here’s everything you need to know to move your IRA offshore in 2017. When done right, moving an IRA offshore is relatively simple.

The first step in moving your IRA offshore is to determine if your account(s) are eligible to be moved. You can move your IRA offshore if the account has vested. This usually means an account from a previous employer… an account that has been transferred from the employer to you.

From time to time, we see clients who have been at the same job for many years. If you’ve been at the company for 10+ years, some of your IRA may have vested. You can check with Human Resources to find out.

Note that you don’t need to be of any particular age to have a vested account. Each IRA from a previous employer is fully vested and eligible to be moved offshore.

Once you have your vested accounts in order, you can begin the process of moving them offshore.

The first step in taking your IRA offshore is to transfer it from your current custodian to one that allows for foreign structures and investments. Most IRA custodians make money selling you investments. So, they don’t want you moving cash out of their control. Note that this is a transfer and not a roll-over. No restrictions apply.

So, you need to move your account to a custodian who charges a flat annual fee, that doesn’t sell investments, and who allows for offshore structures. We recommend Midland, NuView and SunTrust, but there are many good custodians out there.

Once your custodial account is setup, you contact us to form an offshore IRA LLC for you. We incorporate the company, draft the operating agreement, and handle the structuring side of the process.

We also open an offshore bank account for you. Once the LLC and account are ready, your custodian transfers the cash in your IRA to this international bank account.

Your LLC is owned by your retirement account and you’re the manager of that company. That means you have total control over the bank account. You make the investments, send the wires, and write the checks. Your custodian has no control over the bank account.

The asset protection component of the structure comes from the fact that the LLC and bank account are outside of the US and out of the reach of a US creditor. Also, the fact that the custodian has no right to force you to return the money to the US provides an increased level of protection.

That’s everything you need to know to take your IRA offshore in 2017.

The most common question we get at this point is, what size IRA can go offshore?

The answer is that it’s up to you. The costs of moving a retirement account offshore are fixed. They don’t change based on the size of the account. Here’s a summary of those costs:

  • Your US custodian will probably charge a flat fee off $300 per account per year.
  • The cost to form the IRA LLC is around $3,000 depending on the country.
  • The cost to open an offshore bank account is $500
  • The annual fee to maintain the LLC is $500 depending on the country (beginning in year 2)

If you have a reason to take an account of $30,000 offshore and pay these fees, then go ahead. I’d say most clients have $50,000 or more they wish to protect, but everyone’s objectives and investment strategies are different.

I’ll close with a few suggestions for your IRA when you get it offshore. Note that my firm makes money setting up the structure. We don’t sell investments and we don’t earn a commission if you make an investment.

This tip can increase your ROI by 30% or more: When using your IRA, invest in low tax countries! Remember that profits from rental properties or capital gains will flow into your IRA tax free. Investing in a high tax country will lower these returns significantly.

So, hold your stock, FX, and trading accounts in a country that won’t tax your gains. Buy real estate in a country with a low capital gains rate. For example, Belize has a 0% rate, which is about as low as you’ll find!

Next, use your IRA to get a second residency. You can invest $20,000 in Panama, or $35,000 in Nicaragua, using your IRA and get residency for free.

Nicaragua is a great deal if you want to live there. If you spend 6 months a year for two years in country, you qualify for citizenship and a second passport. For more, see: The Best Second Residency Program in 2017

If you want residency without a physical presence requirement, look to Panama. Here you can apply for citizenship after 5 years. For more, see: Best Panama Residency by Investment Program

I hope you’ve found this article on how to take your IRA offshore in 2017 to be helpful. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

UBIT in an IRA
Christian Reeves

What is UBIT in an IRA?

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UBIT in an IRA is a real pain in the rear… at least if you’re IRA is onshore. When you take an IRA offshore, UBIT is not big deal. Here’s an explanation of UBIT in an IRA and how to deal with it.

UBIT stands for Unrelated Business Income Tax. We call this type of income in an IRA UBI and the tax you pay on that income is UBIT. We investors hate UBIT because it results in our IRA investments being taxed at around 35%.

That’s right, not all investments made by an IRA are tax free (ROTH) or tax deferred (traditional account). Some investments are taxable before they reach your IRA account. UBIT is the name for the tax assessed on profits derived from certain investments in your IRA or other plans (401-k, etc.).

UBIT applies to three types of investments in your IRA:

  1. When you buy real estate with a mortgage,
  2. When you buy stocks or other assets with leverage, and
  3. When you invest in an active business that’s not taxed at the corporate level.

When you buy a rental property with a mortgage, income and capital gains attributable to that mortgage are considered UBI. Thus you will pay 35% in UBIT on these profits before they reach your IRA.

For example, you buy a rental property in your IRA. 50% of the money for the purchase comes from your IRA account and 50% from a nonrecourse mortgage.

Because 50% of the money came from a loan, half of the net rental profits each year are UBI and taxable. The other half flow into your IRA tax free.

Likewise, when you sell the property, half of the capital gain is taxed at 35% and the other half flows into your IRA tax free.

  • Yes, that’s correct. A UBI capital gain is taxed at ordinary income rates and not the 20% long term capital gain rate.

The same goes for stocks and other investments made with leverage. Any income earned on that leverage is taxable at 35%, not long term capital gains rates.

This can get really bad in high leverage accounts like as currency / FX trading. I’ve seen leverage at 100 to 300% offshore. Basically all the gains are UBI and you pay UBIT at 35% on each trade.

Last but certainly not least are investments into active businesses from your IRA. When you invest in an active business that passes untaxed income to you, this is UBI and taxable at ordinary income rates.

For example, you invest in a US partnership using IRA money. The partnership issues a K-1 to your IRA LLC reporting net profits. If that K-1 was issued to an individual, he or she would add it to their tax return and pay tax on the profit.

The same goes for an IRA account. You don’t get to deposit untaxed business income into your IRA. You must pay tax on those profits first, just as an individual would. Of the three categories, this one makes the most sense. Without it, all businesses would be held in IRAs and no one would ever pay tax on the profits.

If that same business were operated through a US corporation rather than a partnership, the entity would pay corporate tax at 35% and pass a dividend to your IRA. This is not UBI because the income was taxed at the corporate level. A dividend from a corporation is not UBI while a K-1 or other distribution of pretax money is UBI.

When you have UBIT in an IRA, you must file IRS Form 990-T to report the gain. Your IRA pays this tax, not you (the IRA owner). So, you better have enough cash in the account to cover the bill.

Above and in other articles I always refer to UBIT in an IRA as being taxed at ordinary income rates. This is the simple way to say it… one we can all relate to. Technically, the UBIT rate for an IRA is found in the Trust and Estate tax table, not the ordinary income tax tables.

Trusts and estates have a sliding such that most UBIT will be taxed at 33% or 39%. This is basically the same as the ordinary income rate… certainly close enough for a free blog article!

That’s everything you need to know to understand UBIT in an IRA. Now, here’s how to avoid paying it.

Any time you invest in the United States with leverage, or in an active business using your IRA, you will pay UBIT. There’s no way around it. If you make those investments outside of the United States, you can eliminate UBIT by forming a UBIT blocker corporation.

The same US rules apply to IRAs offshore that apply onshore. Therefore, a distribution of untaxed business profits from a foreign partnership to an offshore IRA LLC is taxable as UBI.

Also like the US, a dividend from a foreign corporation is not UBI and not taxable when it reaches the offshore IRA LLC.

So, if you will make an investment into a foreign business, or are using leverage, you can place an offshore corporation in between the investment and your IRA. Your IRA invests into the corporation and the corporation invests into the business or buys the rental property.

Money flows from the investment back to the corporation. Then the corporation issues a dividend to the offshore IRA LLC. Because dividends are not UBI, no UBIT is payable. We call this a UBIT blocker corporation.

You might be thinking to yourself, hey, that’s pretty slick. Why can’t I do the same thing in the United States? Why are UBIT blockers only available offshore?

Because, when you put a US corporation in between your IRA and your investment, that corporation must pay tax on any gains derived. The US corporation pays 35% corporate tax on US source income. All you’ve done is converted UBI into corporate income taxable at corporate rates instead of trust and estate rates.

The key to an offshore UBIT blocker is that the corporation must be set up in a tax free jurisdiction. If you pay zero corporate tax, you can pass profits from the investment to the corporation and then to the LLC tax free. Once converted from ordinary income into a dividend, UBI is eliminated and the IRA gets to receive the transfer tax free.

I hope you’ve found this article on UBIT in an IRA interesting. For more information on how to setup an offshore IRA LLC with UBIT blocker, please contact me at info@premieroffshore.com or call us at (619) 483-1708.