Many Americans think their retirement accounts are safe from creditors and from the US government. These people are wrong, very wrong. The IRS can size your retirement account without notice and for any type of tax debt. The same goes for child support payments… if you owe, the government can take your retirement account.
IRAs and 401Ks are our lifelines in our old age right? They are what we’ll live on when we can’t work any longer, right? Well, the US government could give a damn. They can take your retirement assets with a few clicks of their keyboard.
If you owe money to the IRS, or are concerned with an out of control government taking of your IRA, don’t think for a minute that the rules which protect you from certain creditors apply to the Federal government. The IRS is exempt from all debt collection rules, including those pesky State Homestead, Retirement, and Pension Exemptions that so often get in the way of hardworking debt collectors.
Obviously collecting money for redistribution is more important than allowing a backstop for Americans in their old age.
The IRS has also exempted itself from the collection laws protecting ERISA plans. Our government may seize any amount in your ERISA plan that has vested. If you have a right to the money (ie. the account is “vested”) the IRS can get to it.
Not to be content to simply exempting themselves from the rules, here’s where the government gets really nasty when IRS takes your retirement account:
When the IRS grabs your retirement account, you must pay tax on that money as if it were distributed to you. If the IRS takes $75,000 from you on June of 2015, you’re required to pay tax on that amount as an IRA distribution when you file your 2015 tax return on April 15 of 2016. If you can’t afford to pay the tax, that’s your problem and the whole collection process starts again.
For ordinary creditors, your retirement account is protected by Federal statute.Traditional and Roth IRAs are covered up to $1,283,025 by 11 U.S.C. § 522(b)(3)(C)(n). Under this law, virtually all retirement account and pension plan funds are exempt from civil creditors.
This means that, if you file Chapter 7 Bankruptcy, you get to keep your retirement accounts. In Chapter 13 bankruptcy, because your retirement accounts are exempt, they won't affect how much you must repay unsecured creditors. For more information, see Your Retirement Account in Bankruptcy.
So, what can you do to protect your retirement account from the IRS? There is one, and only one option - take your IRA offshore before you have a problem with Uncle Sam.
It’s illegal to move assets offshore for the purpose of keeping them away from the IRS. Of course the government has already put up barriers to prevent you moving cash and assets out of their reach.
As of this writing, you do have a right to seek higher returns and diversification offshore. You can form an offshore IRA LLC, open bank and brokerage accounts, and invest in more secure assets – primarily foreign real estate and physical gold - so long as you do it before you owe any money to the IRS.
- I expect the US government to completely eliminate the offshore IRA LLC and your right to invest your retirement account assets offshore in the very near future. For an article on this topic, see Take Your IRA Offshore Before it’s too Late
Another excellent reason to take your IRA offshore is because you are moving abroad. For example, if you will move to Panama, then transfering your IRA into an offshore IRA LLC and buying teak or real estate in Panama is a reasonable thing to do… which means it would be difficult for the IRS to claim you took the account offshore to keep it out of their clutches.
I also note that you can use your IRA to get residency in certain countries. If your retirement account makes an investment in the country, you can often receive a permanent residency visa.
For example, your IRA invests $20,000 in teak, you can get residency in Panama for free. For an article on this topic see How to Get Residency in Panama For Free – Guaranteed! *
* You will need to be sure to avoid self dealing when making the investment through your IRA.
When you take your IRA offshore, keep in mind that the IRS can seize your account at any offshore bank with a branch in the United States. Putting your IRA in HSBC or Citibank in Panama makes little sense if you have a tax issue or are concerned with government interference.
If you are going offshore, you can insulate yourself from country risk by holding assets in local banks and consider diversifying out of the dollar. For this reason, we don’t recommend any bank that has a branch in the United States.
You can also make your IRA collection proof by investing in fixed assets in foreign countries. Assets that can’t be seized or moved such as hardwoods, physical gold in a safe deposit box, and real estate in most countries are good options.
- Note that real estate in Canada, UK and France can be seized by the IRS.
If you would like max protection for your IRA, then you can add many of the benefits of a Cook Island asset protection trust to your offshore IRA LLC structure. Fore more on this, see Protect Your IRA by Converting it into an Offshore Trust
I would like to conclude by reminding you that these techniques should not be used to protect your assets against a current or reasonably anticipated creditor. If you’re concerned that the IRS can take your account in the future, and you want to protect your rights against the great collector, that’s fine.
If you owe money to the IRS now, or plan on owing in the near future, then you shouldn’t move your assets offshore. If you reasonably believe you will owe the government (because you know you can’t afford to pay your 2017 tax bill for example), investing your IRA into an offshore IRA LLC poses certain risks.
I hope this article on how the IRS can take your IRA has been informative. If you are at risk, you should take steps now to protect your retirement account. Please contact me for a free and confidential consultation at email@example.com or (619) 550-2743.