Self Directed IRA or Offshore IRA LLC?

When you want to invest offshore using IRA funds, you have two options. You can set up a self directed IRA account or you can form an offshore IRA LLC. Here’s what you need to know to select between a self directed IRA or an offshore IRA LLC for your retirement account.

To set up a self directed IRA, you simply move your retirement account from your current custodian to one that allows you to “direct” the investments that he or she makes on your behalf. Because all that’s required is for you to move your account from one custodian to another, your setup costs are minimal.

A self directed IRA is simply a retirement account where the custodian allows you to “direct” the investments. You tell them what to buy and they buy it… so long as it’s within the rules.

Because you want to invest offshore, you’ll also need to find a custodian that will allow you to direct investments in foreign countries. Not all custodians are experienced in offshore transactions. You’ll find that many limit you to domestic investments.

Setting up a self directed account to invest offshore is relatively easy. Forming an offshore IRA LLC is another matter. To form an offshore IRA LLC, you’ll need to complete the following steps.

Move your account to a custodian that allows for offshore IRA LLC structures.
Form a Limited Liability company in a country that won’t tax your returns such as Nevis, Belize, Cook Islands, etc.
The LLC should be in the name of the IRA account with you as the investment advisor.
Open a bank account in the name of the LLC.
The custodian invests your retirement account into the LLC and you handle things from there.

The typical cost for an offshore IRA LLC with a bank account is $3,500. Thus, only larger retirement accounts should consider forming an Limited Liability Company. I suggest that the minimum account size is around $100,000.

The benefit of the IRA LLC is that you’re in total control of the investments. You don’t have to request that the custodian send a wire transfer… you are the signatory on the bank account and can send out wires or write checks.

If you want to invest in cryptocurrencies, ICOs, or trade your own account, an offshore IRA is the way to go. If you want to make an investment that a custodian feels is to risky or won’t make for whatever reason, you need an offshore IRA LLC.

The problem with the IRA LLC is that you’re in total control of the investments. This means that all the risk and reward ison your shoulders. You and you alone must understand the IRA rules and and follow them perfectly.

Don’t expect your custodian to give you much advice when you operate an offshore IRA LLC. They’re charging a small fee to maintain the LLC and don’t want the liability associated with giving out free advice. Expect to be required to do the research and figure out the laws on your own.

When you invest using a self directed account, your custodian will ask you questions about the investment and ensure you follow the rules. They’ll be there to help you and will do some vetting of the project. When you invest through an offshore IRA LLC, you have none of this support.

Thus, you’re on your own when it comes to:

Prohibited Transactions as defined in IRC 4975(c)(1) and IRS Publication 590,
Transactions involving disqualified persons as defined in IRC 4975(e)(2),
Impermissible investments as defined in IRC 401 IRC 408(a)(3),
The requirement to ensure all transactions are fair and at arm’s length,
Rules around your receiving indirect benefits from your investments (such as buying a rental property and living in it),
Tax issues around Unrelated Business Income as described in IRC 512 (yes, an IRA is required to pay tax and file returns in certain circumstances), and
A number of other rules and guidelines focused on ensuring you always act in the best interest of the account as a professional investment advisor would.

Because of the complexity of operating an offshore IRA LLC, we generally recommend these structures to sophisticated investors with larger retirement accounts. We also suggest LLCs for those who want to trade their own accounts or make non-traditional investments such as crypto.

A self directed account is best for someone who will make a few investments each year, rather than an active trader. One of the more efficient uses of a self directed retirement account is to purchase real estate.