Tag Archive for: IRA & Retirement Accounts

Diversify Your IRA
Christian Reeves

Proof You Should Diversify Your IRA Offshore Now

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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 www.liveandinvestoverseas.com.  For more costs and rules related to taking your IRA offshore, please send me an email to info@premieroffshore.com.  I’ll be happy to answer any questions you may have.

IRA Gold
Christian Reeves

Buy Physical Gold in Your IRA

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If you see some risk in the U.S. economy and want to protect your retirement savings, I suggest you buy physical gold in your IRA.

This can be done easily enough.  You first move your retirement account to a U.S. custodian that allows for this type of investment.  We then form an offshore LLC and open bank and storage accounts under that entity.  The LLC is the owner of your account and assets… with you as the only signatory on those accounts.  You can now buy physical gold to hold in a vault in Panama or Switzerland, or coins that you take possession of.  You can also open bank accounts in just about any currency and completely diversify out of the U.S.

And now is a great time to buy physical gold.  The growing distrust of America has not translated in to higher gold prices.  In fact, gold is well off its high of $1,895.  Add to this the fact that production is set to decline significantly in 2015 (because the production cost per ounce is skyrocketing) and gold looks like a solid long term investment.

For the first time ever, the majority of Americans are afraid of their own government.  According to a Pew Research poll 53% of us think that the U.S. government threatens our personal rights and freedoms.

Though, in my opinion, the price of gold has little to do with the decision to buy.  While it’s nice to sell at a profit, the focus is to diversify and create a partial hedge out of a U.S. economic melt down.  Gold is the perfect investment to protect your assets.  Because it can be bought and sold just about anywhere in the world, and because you can buy it in your retirement account if you set up an IRA LLC, to buy physical gold at any price is a wise move.

For now, gold’s value is determined by a very complex financial trading system.  Gold is loaned, leased, hypothecated and re-hypothecated over and over.  This inflates the supply – at least on paper – and has a significant downward impact on the market price.  For example, 9,000 metric tons are traded daily while only 2,800 metric tons are mined annually.

This artificial system has created havoc in the market.  When Germany demanded the return of its 700 tons of gold back in 2011 the U.S. couldn’t deliver.  So far, only a small portion has been sent and the U.S. now says it will be some time after 2020 before the full amount can be sent.  Of course, Germany can visit its gold in New York, but they can’t take it until all of the hypothecation contracts are up.

The bottom line is that gold contracts and paper gold often leverage physical gold by 40 to 1.  All of these shenanigans in the paper gold market (EFTs, LBMA, and Comex) push down the price.  If there was no leverage or hypothecated trading, especially as a hedge in FX, prices would be many times higher than they are now.

Again, this is all to say that the price of gold has a lot of potential and is a uniquely interesting investment.  Though, I still believe that, to buy physical gold for your retirement account is not about investment return.  It’s to protect your retirement from the United States and the weakened financial position we find our nation in.

It is also to say that, holding paper gold for the purpose of protecting yourself from a major devaluation or catastrophic collapse is folly.  Fear of the government means you must also fear the economic system in general and that you must hold physical gold.

For these reasons, I suggest you buy physical gold in your retirement account.  The price should not be your primary motivating factor, but know that any event that cuts off leverage and hypothecation will send the value of physical gold rocketing upward.  In a panic, paper gold has no value.  You need the real thing.

I hope you have found this post interesting.  For more information on how and where to buy physical gold in your IRA, please send me an email to info@premieroffshore.com.  I look forward to working with you.

Offshore IRA
Christian Reeves

Invest in What You Know with an Offshore IRA

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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
Christian Reeves

Buy Gold in an Offshore IRA

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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 info@premieroffshore.com for a confidential consultation.  We will be happy to help you take your retirement account offshore and diversify out of the United States.

Offshore IRA Fees
Christian Reeves

Offshore IRA Fees are Low, Guaranteed

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I guarantee that Offshore IRA Fees are lower than what you’re paying in the U.S. on a large managed account.  Put more succinctly, the cost to manage your large IRA offshore should be less than Fidelity’s “No Fee” IRA or 401(k), less than Prudential’s no and low cost options, and less than any managed account you can name.  The larger your IRA, the more you save.

It’s simple:  Offshore IRA Fees are fixed.  If you manage your own offshore IRA account, you should never need to pay:

  • Account Fees
  • Brokerage Commissions
  • Management Fees
  • Investment Commissions
  • Hidden Fees, or
  • Be locked in to only those investments your provider approves.

When you sign up for the “no fee” IRA with most providers, you still get hit with all types of commissions and hidden fees.  Even worse, you are only allowed to invest in those products offered by your provider.

That provider is probably charging you a fee to make the investment and making a lot more on the back-end on commissions from the fund you’re invested in.  Plus, they often add on low balance fees, short term trading fees and account closing fees.

The typical fee structure on many investment funds is 2/20.  Your provider earns 2% per year on money in his fund, plus 20% on the appreciation of the assets in the fund.  If you’re lucky, there is a hurdle rate so they only earn this 20% on earnings over LIBOR, U.S. inflation, or some other benchmark like U.S. Treasuries.  If they place you in someone else’s fund, they might earn a 50% commission, so 1%/10%.  Obviously, they direct you to their branded products.

So, for a “free” IRA, you could be paying a 1% fee to manage your money, brokerage and trading fees on each transaction, 2% on your money placed in their fund, plus they are earning 20% for the use of your money on the back-end.

No wonder IRAs have such dismal returns.  By comparison, Offshore IRA Fees are minimal.  If you take your IRA offshore with us, costs should be as follows:

  • $2,995 to form the offshore LLC, open the offshore bank account, and draft the operating agreement.
  • The custodian we use most often charges $250 to open the account and about $550 per year.
  • Second year fees on your offshore IRA LLC should be around $650.

Note:  Estimates are as of June 15, 2014 and subject to change without notice.  I have not considered bank or wire fees in either the onshore or offshore examples above, but you can assume they are higher offshore.  If you have multiple IRAs, fees from your custodian may be higher.  Your formation fee remains the same ($2,995) because you may place multiple accounts in to a single offshore IRA LLC.

These fees don’t go up as our IRA gets larger.  Your Offshore IRA Fees are fixed, regardless of the size of your account.

You can take control of your retirement account, fix your Offshore IRA Fees at about $1,200 per year (year 2), and eliminate all commissions and hidden charges.

For information on how to take our IRA offshore and control your Offshore IRA Fees, please call or email us at info@premieroffshore.com for a confidential consultation.  We are experts in the offshore IRA and will be happy to work with you.

Offshore Roth Conversion
Christian Reeves

Offshore IRA Roth Conversion to cut taxes

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Are you ready to retire with a large offshore IRA?  Consider an offshore IRA Roth conversion.  You have Romney sized IRA issues?  This article will show you how to deal with your offshore IRA without getting crushed by the new higher tax rates with an Offshore IRA Roth Conversion.

  • Real Estate: For details on how to distribute real estate from an offshore IRA, see my offshore IRA real estate article on this site.  The analysis below is focused on cash and stock accounts.

So, you took your IRA offshore a number of years ago and reaped the rewards of high returns and diversification.  Now, you are facing forced withdrawals from that offshore IRA at ordinary income tax rates plus the multitude of Obama taxes.

We in the industry affectionately refer to the problem of how to extract money from an oversized offshore IRA as Romneyitis.  You might read that much was made in the press of Mitt Romney’s (allegedly) $20M offshore IRA LLC structure . . .what a shame that all that money will come out at ordinary tax rates of nearly 40% when all the new taxes are added onto the typical 35% rate.

You don’t need to be a 1% to be crushed by the new tax rates.  Most of these taxes hit families with incomes between $20K and $500K.  If you take a withdrawal from an offshore IRA and get pushed into these brackets, an offshore IRA Roth Conversion might be in order.

Offshore IRA Roth Conversion Bracketology

The key to minimizing tax on forced withdrawals from an offshore IRA is managing your tax brackets.  One of the best ways to play the IRA bracketology game is to prepay your tax now with an Offshore IRA Roth Conversion.

Yeah, I know a number of you just stopped reading.  None of us like the idea of giving cash to Uncle Sam today for a benefit tomorrow.  Those of you who are still with me, (thank you) and, prepaying your tax with an Offshore IRA Roth Conversion, this can lead to big savings.  Here’s how:

In its most basic form, the Offshore IRA Roth Conversion is great for those with quickly appreciating accounts.  It allows you to pay tax today and for your accounts to appreciate tax free thereafter with no withdrawal requirement.  If the majority of your retirement account is locked in offshore real estate, ad you can afford to pay the tax, the Roth conversion cane make life much easier for your offshore IRA.

No matter how hard it is to accept, prepaying tax can be a solid tax reduction plan.  So long as you can make the payment with cash that’s outside of your offshore IRA, and your tax bracket in retirement is likely to be the same or higher than it is now, IRA Bracketology is for you.  Even better, if you’re in a lower bracket this year than you expect to be at age 70, convert your offshore IRA to a Roth immediately.  You might be in this lucky group if you recently retired but are not yet collecting social security.

Slice and Dice Your Offshore IRA Roth Conversions

If you buy my argument that paying tax today can save you big in the long run (to be continued below), then you might consider slicing and dicing your offshore IRA to maximize the value of your Roth conversion.  Put simply, you can divide your IRA into multiple accounts, convert them all to Roths and selectively revoke these conversion, on accounts that have gone down in value, by the due date of your return (October 15 on extension).

  • Much like the Offshore IRA LLC and the inherited IRA, I don’t believe this tax loophole will be around for long.

Let’s say you have $500K in an offshore IRA you want to convert to a Roth.  First, slice this into five accounts of $100K each.  Next, invest each into different (high return) opportunities.  Maybe one goes into rental real estate in Panama, one into a currency trading account in Cayman, one into hardwood in Brazil, one to merging market debt and one into a BUI hedge fund.

Assuming you file an extension for your personal return, you have until October 15 to see how these investments perform.  If you lost money trading currencies (as I always do), then you should undo that conversion.  If your hardwood and real estate investments are appreciating nicely, keep them as Roth accounts and send the IRS a check.

Back to Offshore IRA Roth Conversions

If you are 55 to 70, an Offshore IRA Roth Conversion is probably a great move . . .but always a tough sell.  The fact that you’ve read this far is much appreciated.  I’ve seen cases where clients could save $500K in taxes over a number of years by converting a $1M offshore IRA, but just would not pull the trigger.  Noone likes to pay the IRS today for a future benefit.

For those of you on the fence, here’s a look at the numbers:

You probably have a good understanding of your tax bracket.  From her on, I’ll assume it’s 35%.  Now, let’s talk about the bracket busters – four taxes that push you up over 35%.

First is the Obamacare tax.  In order to cover the cost of the healthcare remodel, a 3.8% bonus tax applies to investment income if your AGI is above $250K (joint).  For example, if your salary is $240K, plus capital gains and dividends of $35K per year, your AGI is $275K and the 3.8% bonus tax applies to $25K.

In the case of the Obama tax “investment income” does not include earnings in your retirement account or a withdrawal from an offshore IRA (or any IRA for that matter).  It bumps up the tax rate on unsheltered assets like your after tax offshore brokerage account.

The same is true of withdrawals from an offshore Roth.  These are not considered income.  However, a withdrawal or conversion from a traditional IRA (pre-tax account) is added to AGI and counts toward the 3.8% healthcare tax.  Therefore, a mandatory withdrawal from an offshore IRA can bump other income, such as dividends into the Obama tax bracket.  If your only “income” is from an Offshore IRA Roth Conversion, this 3.8% tax does not apply.

If you have a Romney sized IRA, where your forced distributions are $100K-$200K per year, or your finances are such that these forced withdrawals from an offshore IRA will push you over the $250K threshold year over year, a Roth conversion might be just what the doctor ordered.  Yes, you will pay the 3.8% tax on your 2014 unprotected income, buy you limit the pain to only one year of dividends and capital gains.  In this situation an Offshore IRA Roth Conversion could save 20 years of bracket busting taxes of 3.8% on unprotected income.

The Obama tax is the biggest, but not the only bracket buster.  For example, if your joint income is over $305K to $428K this can add 4% to your marginal tax rate (I’ve assumed a family of 4 and simplified the calculations a bit).  If your income is just below this range, you will probably benefit from an Offshore IRA Roth Conversion.

The last bracket buster I’ll consider is the Medicare slam dunk.  If your income is b3tween $170K and 428K, your Medicare premiums increase.  In essence, this boosts your taxes by 2%.  You can eliminate this tax by converting your offshore IRA to a Roth before you hit age 65.

If the above tax bracket busters apply to you, consider an Offshore IRA Roth Conversion.  Also, if you are in a high tax state, or subject to AMT, then the benefits of converting are multiplied.  AMT usually hits those with incomes of $200K to $500K.

Expat Tip: If you’re planning to move out of the U.S. (or to a low tax state), hold off on the Offshore IRA Roth Conversion.  Wait until you obtain tax residency in your new country and then convert.  This should keep the ex state out of your pocket.

I hope you have found this article helpful.  Thank you for sticking with me.  Feel free to phone or email to info@premeiroffshore.com anytime.  We will be happy to help you move your IRA or other retirement account from a previous employer out of the United States.

Real Estate in an Offshore IRA
Christian Reeves

Distribute Real Estate in an Offshore IRA

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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 info@premieroffshore.com for a confidential consultation.  We will be happy to work with you to structure your offshore IRA in a tax efficient manner.

Asset Protection, Banking Offshore, IRS and Retire, Offshore Bank Accounts
Christian Reeves

Eliminate UBIT in Your IRA by Investing Offshore

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Are you paying Unrelated Business Income Tax in your IRA? Want to eliminate UBIT in your IRA? Is your retirement account invested in U.S. mutual funds or hedge funds? Are you thinking of taking control of your retirement account with an offshore IRA LLC and are concerned with UBIT? Do you have no idea what the heck UBIT is? Here are the ins and outs of UBIT in your IRA or other retirement account structures.

Let me start with the basics: Unrelated business income tax is a 35% tax paid on certain types of income earned by a retirement account. Regardless of whether you are a ROTH or a traditional, a 401K or a SEP, UBIT can apply to you…but it is simple to eliminate UBIT in your IRA, go offshore!

  • If your retirement account is invested in traditional stocks and bonds, or just about any type of passive investment, you don’t need to worry about UBIT.

The most common forms of UBI in an IRA is income from leverage or profit distributions from an active business. For example, if you purchase a rental property in your ROTH and 50% of the money comes from your retirement account and 50% from a non-recourse bank loan, then 50% of the profits generated will be taxable at 35% as UBI and 50% will flow through to your ROTH tax free.

Another example is a leveraged brokerage account. If you use leverage in the trading account held by your IRA, then income generated by that leverage is taxable.  If you leverage the account 10 times, then the majority of your income will be taxable and only that portion attributable to your original deposit will be tax free.

Finally, if you invest in an active business, or in to a U.S. hedge fund that invests in active businesses, then you might end up paying 35% tax on all profits generated. This is because the business or fund passes income to you, often on Form K-1, which is taxable as income not related to typical investing.

The solution for UBIT from investing in U.S. funds is simple – DON’T DO IT! A tax preferred investor should never be talked in to a U.S. fund that will generate UBIT. If the fund is structured properly, it will have an offshore feeder component. By investing in the offshore feeder, rather than the U.S. LP or LLC, you completely eliminate UBIT.

As shown below, traditional U.S. investors should come in to a fund through a U.S. structure while foreign and tax preferred investors (retirement accounts, pension funds, etc.) should come in through an offshore corporate entity. If the fund you are being sold does not have a structure for retirement accounts, you can be assured they will also be dazed and confused when it comes to reporting and tax compliance, so don’t get involved.

eliminate UBIT

eliminate UBIT

So, the costs and planning to avoid UBIT in a mutual fund or a hedge fund (should) fall on the administrator of that fund. If you are running your own investment account using leverage, or investing in real estate through leverage, you need to create your own offshore structure to deal with the tax.

Smaller retirement account investors are generally told they can’t use leverage. Accounts that are with private banking divisions, or with professional trading platforms, are allowed to access leverage at their own risk. In other words, the broker or bank won’t help you when it comes tax time.

To eliminate UBIT in your retirement account you need to 1) take that retirement account offshore in an LLC and 2) form an offshore UBIT Blocker Corporation under the LLC. This offshore corporation is the entity that holds the trading account or purchases the property. Income flows to the corporation, then the LLC, and then in to your IRA.

Here’s the trick: UBIT applies to income from leverage or ordinary income received by the IRA. By sending that money first in to an offshore corporation, and then in the LLC as a dividend, you eliminate the UBI character of the transaction and thereby jettison UBIT.

If you would like more information on the IRA LLC structure, please check out my Self Directed article.

For more information on investing in an active business, please read Can I Invest in a Business with my IRA?

As always, please post general questions in the comments below or contact me at info@premieroffshore.com for a confidential consultation.

Offshore Captive Insurance Company
Christian Reeves

Can I Invest in a Business with my IRA?

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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 info@premieroffshore.com. 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
Christian Reeves

Eliminate Tax on Leverage in your IRA with UBIT Blocker

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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 info@premieroffshore.com 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
Christian Reeves

Is Your IRA Confiscation Proof?

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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 info@premieroffshore.com or at (619) 483-1708 for a confidential consultation.

Solo 401k for Expats
Christian Reeves

Solo 401k Retirement Plans for Expats

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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.

Summary

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 info@premieroffshore.com for a free confidential consultation. I will be happy to work with you to develop a plan that will reduce your worldwide tax burden.

Helpful Links:

 

Seize my IRA
Christian Reeves

Can the Government Seize my IRA?

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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
Christian Reeves

2013 Retirement Account Limits

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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

SIMPLE IRA Limits

(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
Christian Reeves

Fiscal Cliff Tax Break for Your 401(k)

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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.

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.