The reason to set up an international self-directed IRA is that you want to take control of your investments. You want to buy in the best foreign investments to maximize returns to your retirement account. You want to become the investment advisor and search out unique and high returning investments. You want to earn more than a boring US index fund offers. You might even want to protect your retirement savings by moving it out of the United States and by diversifying out of the US dollar.
In order to take control over your retirement account, you must first set up a self-directed IRA. And this account must be at a US custodian experienced in offshore transactions. While several firms offer self-directed accounts, very few allow international transfers.
For most, setting up a self-directed account simply means moving from your traditional custodian to one that allows for foreign investments.
Where We Are Going In 2020
The most popular foreign investment for self-directed IRAs in 2019 was international real estate investments. In this category, people tend to focus on condominiums and single-family homes which they plan to rent out. Some buy commercial real estate and a few purchase raw land which they plan to hold or build on.
- When you improve raw land, just remember that all the money for the project should come from your IRA.
- You and your friends can partner together on larger real estate deals such as hotels and office buildings.
Yes, an IRA can legally own real estate and a lot of other alternative investments. Going into 2020 top investments for self-directed accounts include private equity, promissory notes, physical gold and certain gold coins, oil and gas, and cattle. Your IRA can’t own insurance, collectibles or stock in S corporations.
The way to find the best foreign investments for your self directed IRA in real estate is to balance expected returns (rental income and appreciation) with the capital gains tax you will pay in the country.
When you buy real estate abroad with your personal savings (after-tax money and not an IRA account, you should look for properties in countries with a capital gains rate of 20% or less. That’s because you’ll pay a maximum of 20% (more on this in a second) on long term gains no matter where you live and no matter where the property is located.
In 2019 and 2020 the capital gains tax rates are either 0%, 15% or 20% for assets held more than a year. Capital gains tax rates on most assets held for less than a year correspond to ordinary income tax brackets (10%, 12%, 22%, 24%, 32%, 35% or 37%).
Because long-term capital gains tax is a tax on profits from the sale of an asset held for more than a year, long-term capital gains tax rates are 0%, 15% or 20% depending on your taxable income and filing status. They are generally lower than short-term capital gains tax rates.
Long Term Capital Gains/Income levels:
0% = $0 to $39,375
15% = $39,376 to $434,550
20% = $434,551 or more
This means that the highest capital gains rate you’ll pay on the sale of foreign real estate is 20% (if you are in a higher income bracket). Remember, US citizens are taxed on worldwide income and it is your responsibility to declare your income on all income you make throughout the year. When you sell a foreign property, you’ll pay the US long term rate of 20% to the IRS. Then you get a dollar for dollar credit for any foreign taxes paid.
For example, Colombia has a capital gains rate of 10%. So if you sell a property in Colombia that you’ve held for at least 2 years, you’ll pay 10% to Colombia. Then, when you file your US return, you’ll report the gain and use the Foreign Tax Credit to get a credit for the 10% paid to Colombia. The result is that you’ll pay 10% to the IRS (20% US rate minus the 10% paid to Colombia, for a total global tax rate of 20%).
So, again, when investing non-IRA funds, you want to look for countries with a capital gains rate equal to or lower than the US rate. The list of countries with capital gains rates of 20% or less is quite significant. See: Capital Gains Tax by Country.
Because you pay zero US tax on money deposited into your retirement account, and assuming returns are equal between countries, the best foreign real estate investments for your self directed IRA will be in countries with a zero capital gains rate. That is to say, any capital gains tax paid will reduce your net returns and won’t give you a corresponding US tax credit… so, it’s money wasted.
Most Popular Countries
The most popular countries with zero capital gains tax include New Zealand, Hong Kong (even though the country is a mess it still has zero percent if held for at least 36 months) and Belize. Most of the other countries with no capital gains rate are in the Caribbean.
Another best foreign investment with a self-directed IRA is Panama hardwood. Your retirement account can buy a parcel in a teak plantation and you can pair it with a residency with a path to citizenship in 5 years. You’ll need to pay residency fees from your personal account. You can’t receive an indirect benefit from your retirement account, thus you need to cover some expenses from your savings.
This program is only available to US citizens and citizens of the “50 friendly nations.” For a list of those countries, and more information on this program, see: How to get Residency in Panama Using Your IRA.
Then there are clients that want to trade their own accounts or invest in cryptocurrencies. These active traders need to form an offshore LLC or IBC in addition to moving their accounts to a self-directed custodian that allows for international investments. Because this adds about $3,500 to your startup costs, you should be committed to these investments before moving forward.
I hope you enjoyed this article: Best Foreign Investments for a Self Directed IRA. To talk to our partners about your SDIRA, please reach out to them here. They will be happy to help you. For additional information you can download their FREE GUIDE ~ Learn How to Take Control of Your Investments with a Self-Directed IRA. It is really quite information!
And lastly, if you are thinking about residency in Panama, please contact us here and we will be happy to make an appointment to talk about Panama. In the meantime, here is a great country guide about Panama.
Here are a few articles that may help you understand Self Directed IRA:
About The Author
Mikkel Thorup is the host of The Expat Money Show podcast and Director of Content at Escape Artist. He is also the author of #1 Best-Selling book Expat Secrets on Amazon. He has spent nearly 20 years in continual travel around the world, visiting more than 100 countries including Colombia, North Korea, Zimbabwe, and Iran. His goal is to help people just like you to generate additional streams of income, eliminate your tax bill, and take advantage of offshore structures so you can travel the world freely and never have to worry about money again. For more information on his legal (but creative) tax strategies for Expats watch this free video.
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