There has been a significant increase in the amount of marketing directed towards IRA owners for non-publicly traded investments. Many of these investment sponsors and promoters are using marketing slogans like “IRS Approved” or “IRA Approved”. Don’t be fooled though, as the IRS does not review or approve investments, nor do they comment or issue statements on investments in an IRA. In fact, the IRS recently revised and updated IRS Publication 3125 titled, “The IRS Does Not Approve IRA Investments,” in an effort to inform IRA investors.
IRAs Can Invest into Non-Publicly Traded Investments (Real Estate, LLCs and Precious Metals)
Yes, it’s true that a self-directed IRA can invest into real estate, LLCs, LPs, private stock, venture or hedge funds, start-ups and qualifying precious metals, among other things. However, just because you can invest in all of these assets doesn’t mean that you should. Make sure you’re investing your IRA into assets you are familiar with, and with persons and companies with whom you have thoroughly vetted. Non-publicly traded investments can be easier to understand and vet than a mutual fund prospectus, but you need to be careful when investing your funds with another person or when buying investments from third-parties who regularly sell to IRA owners using comforting, yet totally false, representations like “IRA Approved” or “IRS Approved.”
“IRA Approved” or “IRS Approved” Representations are False
In Publication 3125, “The IRS Does Not Approve IRA Investments,” the IRS provided some guidelines for IRA owners to evaluate and protect their account from “IRA Approved Schemes.”
- Avoid any investment touted as “IRA Approved” or otherwise endorsed by the IRS.
- Don’t buy an investment on the basis of a television “infomercial” or radio advertisement.
- Beware of promises or no-risk, sky-high returns on exotic investments from your retirement account.
- Never transfer or rollover your IRA or other retirement funds directly to an investment promoter.
- Proceed with caution when you are encouraged to invest in a “general partnership” or “limited liability company”.
- Don’t be swayed by the fact that a bank or trust department is serving as an IRA custodian.
- Always check out an investment and promoter before you turn over your money.
- Educate yourself about IRAs and retirement planning.
- Exercise extra caution during tax season when it comes to making IRA investments.
As a self-directed IRA investor, you are solely responsible for investment decisions, and as a result you must make certain that you understand the investments you are selecting and the associated risks. Beware of slogans and terms like “IRA Approved” or “IRS Approved,” as such slogans are just false. In addition to the consideration from the IRS above, I’ve previously written my own “Self Directed IRA Investment Due Diligence Top Ten List” which includes additional tips and questions to ask when investing your hard-earned retirement plan dollars with others.
Take the IRS guidelines and my Top Ten List into consideration when investing your IRA, but in the end, don’t be scared about investing into non-publicly traded investments. Rather, keep the risk and opportunities in perspective, and realize that you may need to get out of your comfort zone by asking pointed questions, demanding additional documentation, or simply saying “no.” Remember: You are the best person to protect your retirement.
Are you a U.S. citizen considering moving yourself or your money outside the U.S.? Before you or money leave the USA, first consider the tax and legal consequences as they are often misunderstood.
U.S. Citizens have numerous tax and reporting obligations that arise from their foreign assets, investments, and accounts. In essence, if you have foreign assets, investments, or bank accounts, then you have two obligations to the United States Government.
First, you must disclose any foreign bank account whose value is over $10,000 (all foreign accounts are combined to reach the $10,000 threshold) and you must report any foreign asset (e.g. foreign stock, company ownership, etc.) whose value is $50,000 or greater. The form required to be filed annually to discloseforeign bank accounts in excess of $10,000 is known as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The form filed annually to disclose foreign assets with a value in excess of $50,000, is IRS Form 8938, Statement of Specified Financial Assets. In sum, the first obligation U.S. citizens have to their home country is the disclosure of foreign bank accounts and foreign assets.
Second, as a U.S. citizen you are required to pay U.S. federal income tax on the foreign income you receive as the U.S. taxes its citizens on income no matter whether it was earned in the U.S. or abroad. In other words, even if you make money outside the U.S., as a U.S. citizen, you are still required to pay federal tax on that income. If you paid foreign income taxes to the country where the income was derived and if that country has a tax treaty with the U.S., then you’ll typically receive a credit in the U.S. for the foreign taxes paid, which thereby reduces the amount of federal taxes owed in the U.S. Click here to see the list of countries with a foreign tax treaty with the U.S.
Some U.S. citizens presume that if they leave the U.S. that they are no longer subject to federal income tax in the U.S. but this is not the case. Even if you relocate to a foreign country and no longer earn income from the U.S. you are still subject to U.S. tax and on your foreign income (and potential state income tax depending on your state of residence). The only way to entirely escape the tax jurisdiction of the United States is to renounce U.S. citizenship but this is a costly and expensive process with numerous tax repercussions. See the Expatriation Tax rules from the IRS for more information here.
Let’s run through a common example that demonstrates how the disclosure and income tax reporting requirements work. A U.S. citizen has a bank account in Switzerland with a balance of $100,000. That account generates income of $5,000 for the year. For example purposes, let’s say that the $5,000 in income resulted in taxes owed to Switzerland of $500 and that the U.S. citizen reported and paid the tax to Switzerland. In addition to compliance with Switzerland law, the U.S. citizen would need to file FinCEN Form 114 (FBAR) to disclose the foreign bank account. The FBAR form filing is due by June 30th for the prior year’s accounts. The U.S. Citizen would also need to file IRS Form 8938, since the account was over $50,000. Form 8938 is due with the filing of the U.S. citizen’s federal tax return. In addition to the two disclosure forms that are filed in the U.S., the $5,000 of income from the Switzerland account must be reported as taxable income on the income tax return (form 1040) of the U.S. citizen. The $500 paid in tax to Switzerland will be credited to the taxpayer in computing the tax owed to the U.S. because the U.S. and Switzerland have a tax treaty. In sum, a $100,000 foreign bank account resulted in two disclosure form filings to the U.S. and inclusion of the income on the U.S. citizen’s federal tax return.
These are just the basics and every country has their own nuances. In addition there are many special rules and there are numerous exceptions to the filing discussed herein and as a result a U.S. citizen leaving the U.S. or sending money outside the U.S. should seek out experienced professionals to assist them in their U.S. tax and disclosure reporting obligations.