Taking Your IRA Funds Offshore: An Offshore Expert’s Strategy

When I first began talking about the idea of investing IRA funds offshore more than 15 years ago, people wrote to tell me I didn’t know what I was talking about.

Couldn’t be done, they insisted… the IRS didn’t allow it.

Today, an industry exists to help people take their IRAs offshore.

Why would you want to do that?

The fundamental reason is diversification. In addition, offshore investment options sometimes offer better returns.

Plus, taking your IRA funds offshore can take them beyond the reach of the U.S. government and others who might get it in their heads to try to snatch them from you.

Now that I’ve had years of experience witnessing and personally undertaking the process of investing IRA funds offshore, I’m less enamored with the idea than I used to be.

The biggest reason someone becomes interested in the idea of using IRA funds to invest offshore is because his IRA account holds a sizable percentage of his overall investable capital. Without those funds, most people don’t have enough money to buy that beach condo on the coast of Mexico, say.

Unfortunately, if you use IRA funds to buy a property overseas, you can’t use that piece of real estate yourself. One of the main caveats associated with investing IRA money is that you can’t benefit from the investment personally.

That’s one reason you can’t invest IRA funds in collectibles. Hang a piece of art on the wall of your home, and you’re benefitting from it personally.

Any property you buy with your IRA has to be for investment purposes only.

Many people using IRA funds for the purchase buy a property for investment with the idea of converting that property to their retirement residence at a later date.

That can work, but you need to think through the math.

When you begin benefitting from a piece of property purchased with IRA funds (by using it personally), you trigger a distribution, and you’ll be taxed on that distribution amount.

Note that Roth IRA funds are an exception. More on this in a minute.

In addition, you’ve got to remember that IRAs come with mandatory distribution requirements. At age 70 ½ you’ll be required to take a minimum distribution. If your IRA is fully invested in real estate and holds no liquid assets, you could be forced to sell a property or to take a larger-than-required distribution.

Again, it’s a matter of doing the math in advance. If you plan for these tax events, you can be okay. Don’t plan and you could find yourself on the short end of the cash flow stick.

The other aspect of investing IRA funds offshore that many people don’t think through has to do with the associated costs.

A traditional IRA held at a financial institution comes with no or very low annual fees. Competition is high for IRA money. Plus, banks and brokerage houses make money when you buy and sell stocks, bonds, and mutual funds in your IRA.

However… and for that reason… those traditional custodians don’t let you invest in non-traditional investments. They want you investing in the products that earn them commissions.

The custodians that allow you to invest in overseas real estate and other unconventional investments charge fees to keep their doors open, as much as hundreds of dollars per year just for the administration. Add to that a fee for each investment you hold, and you can be looking at a not insignificant annual expense to maintain your IRA with a custodian that allows you to invest offshore.

That can be fine if you have enough funds in your IRA to amortize the cost. However, if your IRA is small, too much of your annual return can be eaten up in fees.

You can minimize the fees associated with each individual investment by setting up a single-member LLC owned by the IRA as the investment vehicle.

Traditionally, offshore pundits recommend using an offshore LLC for this purpose if your intention was to invest the funds offshore… and that can work…

However, an offshore entity costs more to set up and maintain than a U.S. LLC.

Further, as your IRA is already a U.S. structure, any asset protection that could be gained by using an offshore entity for the LLC inside the IRA is reduced or eliminated.

Another thing to think through when considering investing your IRA offshore is the tax implications. Any income or capital gain earned by your IRA grows tax free even if you invest it offshore. However, that tax-free status applies only in the United States.

The country where you invest will have its own tax rules, meaning you could find yourself paying tax on your IRA earnings in that country and not getting any benefit from that burden on your U.S. tax return in the form of tax credits (because you aren’t paying any U.S. tax).

The foreign tax could eliminate any benefits from higher returns you expect from your offshore investment.

As I suggested above in the exception I noted, one tax-efficient way to invest your IRA offshore could be to use Roth IRA funds for investments in a jurisdiction where income from those investments isn’t taxed. Using this strategy, you could create a cash flow from the IRA that is tax free both in the United States and in the country where you’ve invested.

Not many investments would qualify for this strategy, but Panama offers two.

Bank interest isn’t taxed in Panama. Right now one bank is advertising a 16-month CD paying 5.5%. That 5.5% interest is over the entire 16 months. The annual interest rate works out to 4.125%, which is still at the top end of the market in Panama right now… and definitely better than what you can get in the States.

The other investment that isn’t taxed in Panama is revenue from agriculture.

Agriculture revenue is exempt up to US$350,000 a year. Invest in a turnkey agricultural plantation and you won’t pay taxes in Panama.

Use your Roth IRA and you won’t pay taxes in the United States either.

And you could withdraw the annual income from your plantation out of your Roth IRA as a tax-free annuity.

Now there’s a strategy.

Lief Simon