When you set up an offshore IRA LLC, you become responsible for your investments. You are the manager of the LLC and the person who signs the checks or send the wires. In that capacity, you are the one responsible to ensure your IRA follows all the rules. Here is a partial list of the prohibited transactions in offshore IRAs that you need to be aware of.
Note that this article on prohibited transactions in offshore IRAs is focused on those managing their own retirement accounts through an offshore IRA LLC. When you set up an offshore IRA LLC, you become the manager of that structure and the person responsible for the limited liability company. You step into the shoes of a professional investment advisor.
That means you’re to manage the retirement account just as a professional would. You must follow all the same rules and always act in the best interest of the account. You can’t borrow from the account or gain any personal advantage from the investments. You must use the same care as you would expect from a 3rd party advisor.
The risk with offshore IRA LLCs is that the manager (you) don’t understand the rules. You might think, hey this is my money… I can do with it as I see fit. Well, you would be wrong. If you’re going to take your account offshore, you must be ready to put in the time to understand all the rules… to understand what you’ve gotten yourself into.
The alternative is to invest offshore through a self directed account. In this case, your custodian makes the investments and is the person responsible for ensuring you do not engage in a prohibited transaction.
Self directed IRAs are suited to those who won’t actively trade their accounts and plan to make 1 to 3 international investments. Offshore IRA LLCs are for those who will trade their accounts, want to control the investments, and/or will have many international investments.
There are three basic categories of rules for offshore IRA LLC transactions. They are 1) prohibited transactions, 2) self-dealing, and 3) conflicts of interest.
Violating any of these rules can result in the entire account being cancelled as of the date of the error. That means your entire IRA, and not just the portion invested improperly, would be distributed to you with significant penalties (including early withdrawal penalties).
So, without any more adieu, here are some of the prohibited transactions to watch out for in an offshore IRA LLC.
Section 4975(c)(1)(A) prohibits the indirect sale, exchange, or leasing of property between an IRA and a “disqualified person.”
The most common disqualified persons are:
- A fiduciary of the IRA
- A person providing services to the IRA or the offshore IRA LLC
- A company where you own 50% or more of the shares (voting or control)
- Family members including your spouse, parents, grandparents, children, or any spouse of a lineal descendant.
- Note that brothers, sisters, brother-in-laws, sister-in-laws, nieces, nephews, aunts, and cousins, are not disqualified persons.
- An officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10% or more shareholder, or highly compensated employee (earning 10% or more of the yearly wages of an employer).
An example of a prohibited transaction would be buying a property in your IRA and leasing that property to yourself or your son. You’re not allowed to rent the property from your IRA even if you pay fair market value. Also, you can’t stay in the property for even one day (regardless of whether you pay rent or not).
Likewise, you can’t sell a property in your IRA to yourself or a disqualified person. Nor can you transfer or sell property that you own to your IRA. We see this in many international transactions. You buy the property and then sell it a day or two later to your IRA because “it was just easier that way.” This is never permissible.
Finally, you can’t use personal (non-IRA) funds to pay the expenses related to your investments or your rental property. You can’t use your savings to improve the property, pay commission, taxes, etc. All of this money MUST come out of your offshore IRA LLC.
The next type of prohibited transaction is the direct or indirect lending of money or providing credited between the IRA and a disqualified person. This is covered in IRC 4975(c)(1)(B) .
For example, it would be improper for you to lend money out of your offshore IRA LLC to your son or to yourself.
It would also be a prohibited transaction to use the assets of the IRA to secure a personal loan. In fact, you can’t use the IRA to secure any type of loan or mortgage. They only kind of mortgage an IRA can accept would be an unsecured loan.
And the reverse is also not permitted. You can’t personally guarantee a loan to your IRA nor use your personal assets as security. This is true when you use leverage in a brokerage account or a mortgage. Again, only non-recourse loans are allowed.
I hope you’ve found this article on the most common prohibited transactions in offshore IRAs to be helpful. These are just the basics and I have left investments in partnerships and businesses for another day.
For the most popular investments see: Best IRA Investments for 2018
For more information on converting to a self directed IRA or forming an offshore IRA LLC, please contact us below by filling out the form. Thank you. We look forward to working with you structure your retirement account abroad.