There are many risks in taking your IRA offshore. When you use an foreign service provider, who is not an expert in US laws, those risks are amplified several fold. Here’s what to watch out for when taking your IRA offshore.
The impetus for this post were three calls I received last week. Two were from people who had used an offshore incorporation mill to form their IRA LLCs and one was from a person who was told he could improperly titled a real estate purchase in his IRA.
All three of these calls could spell financial disaster. Improper IRA management can result in your ENTIRE account being forcibly distributed to you. A premature distribution means that you must pay tax on all of the gains immediately plus, in most cases, a 10% early withdrawal penalty.
Because you’re the manager of your IRA LLC, you and only you are responsible (ie. liable) for all transactions. When you make a mistake, the IRS might also hit you with fraud or negligence penalties. These can reach as high as 75% of the tax due. For more, see: Income Tax: Fraud vs. Negligence
The two calls I got on IRA LLC formation were from people who had used a bank in Belize to form their IRA LLC. The bank had no idea what they were doing and completely screwed it up.
Here’s what’s supposed to happen. You form an offshore IRA LLC in a zero tax jurisdiction, which is owned by your retirement account. You’re the manager of the LLC and the offshore company is owned by your retirement account.
Then you draft a very specific and detailed IRA LLC operating agreement. This is to be signed by you, the manager, and your US custodian in its capacity of custodian and in its capacity of account representative.
The offshore bank account is opened in the name of the LLC with you as the manager… again, you are not the owner of the account or the LLC. Your job is to manage the assets of the retirement account as a professional investment manager would. Your retirement account is your client and you have a duty of care to that client.
All of the above requires care and a solid understanding of US law. Something lacking in many offshore incorporation mills. Remember that with control comes liability.
The Belize bank set up a standard LLC owned by individual. The account was opened in the name of this LLC and with the individual listed as the beneficial owner.
Because the IRA was already set up in the US as a self directed account, the owner was able to wire the funds from the United States into this LLC without any checks or balances and without a custodian telling them NOOOOOOOOO.
The IRA account owner had unwittingly distributed his entire account to himself. All the gains in the account became taxable and a 10% penalty applied. Basically, both callers hand closed out their IRAs and were now fully responsible for taxes and penalties.
And they had no recourse in Belize. Clearly the bank was in way over its head and gave horrible advice. But, what can the account holder do? Spend thousands of dollars on lawyers in Belize in the hope of collecting a judgement… yeh, good luck with challenging a major institution in a local court.
The real estate call came in from someone planning to buy property in Panama. A local real estate agent told them they could pay for the property with personal savings and then title it in the name of their IRA… again, the offshore providers answer was, “sure, no problem dude!”
So many of these guys have no idea what they’re doing and will say anything to make the sale.
Had the investor not called us first, they would have opened themselves up to all manner of penalties. Because they’re the manager of their retirement account, they could also face fraud or negligence penalties.
In the case of a false real estate transaction, a negligence penalty of 20% is very likely. He knew he didn’t use IRA funds to buy the property and titled it in the name of his IRA anyway… a very tough case to defend.
This investor is facing the following fees: taxes on all gains in his account over the years, 10% early withdrawal penalty, 20% negligence penalty, and immediate termination of his account.
You might be thinking, that he should just carry on and hope he doesn’t get caught. If he did that, he might add on a fraud penalty of 75%!
Plus, if he does get caught, the taxes and penalties will apply to the tax year where the error was made. If 5 years have passed, he’ll owe these taxes and penalties plus interest on the resulting tax debt over the 5 years he failed to come clean.
The point of this message is simple: If you’re going to take an IRA offshore, hire a US professional. Spend the money on a US expert because all of your risk is in the United States! Foreign advisors will tell you what you want to hear while US advisors will tell you what you need to hear.
Don’t fall into a pit of trouble with inexperienced offshore incorporation mills. Go with a firm that knows what they’re doing. If you don’t select Premier, find someone in the US that you’re comfortable with.
I hope you’ve found this article on the risks in taking your IRA offshore to be helpful. For more information, or to speak with one of our offshore IRA LLC experts, please contact me at firstname.lastname@example.org or call us at (619) 550-2743. All consultations are free and confidential. We’ve been forming these specialized structures since 2002.