The legal basis for a 402(b) Overseas Retirement Plan

16 Feb

USS Roper anchor on display at the Massachusetts Institute of Technology - Overseas Retirement Plan

USS Roper anchor on display at the Massachusetts Institute of Technology, Cambridge, Massachusetts, USA.

A Nonqualified overseas retirement plan has characteristics that are opposite of what we have all been used to. This specific 402(b), the Regulated Asset Protection Structure (RAPS), allows for pre-tax contributions. There are no maximum contribution limits as this is a nonqualified deferred compensation tax law issue. The fact that this is precisely the opposite of a qualified plan requires a mental shift in attitude to investigate.

There is a U.S. bias, in this area, on deductible contributions. That bias makes the assumption that all contributions from all sources to a retirement plan have some form of taxability up front. All of that is true. Because of that bias when a U.S. person looks at a foreign retirement plan they immediately object to its structure because of remuneration level caps. Therefore, in the context in which we are looking, thinking about contribution limits would mean this is an unworkable proposition or something of that nature. The answer to that thought is that this is a nonqualified plan, so, therefore the only relevance to remuneration level is if you are looking for U.S. deductibility.

If you are looking for non-U.S. deductibility, well then, you proceed. That’s where you get deductibility – outside the USA; not within the USA.

The legal basis for a 402(b) Overseas Retirment Plan really boils down to two things that count. One is that there needs to be growth (contributions) rather than a capital injection. Secondly, is the W8 BEN-E. The person needs to have somebody who is able to sign it. Whether it is you or me or someone else that the 402(b) Trustee authorizes, the client has to have it. Without that there is nothing because an account can’t be operated without it.

Regardless of the headlines the individual needs to forget about capital injection and go for predictable growth which is something that is not abusive and he needs to be in a position where he can get someone to sign a W8-BEN-E for him.

Thirdly, has to do with what is happening to IRA’s. You have seen the analysis that people are pumping IRA’s full of low price, pre-IPO’s stock and when the IPO blooms somehow or another that is supposedly a magic call. So these people are looking pretty slippery, well they are not slippery as the IRS is investigating them now.

The difference between the IRA onshore and the 402b offshore is the 402b message that needs to get across is that the 402(b) is different because you are not asking for tax breaks up front. You are asking for tax breaks later on and the later on is all that counts and it has to be sensible and justifiable.

FATCA & the IRS defined exactly what is an occupational retirement plan, that was an outcome of FATCA (an unintended outcome) because the purpose of FATCA was to find the PFIC to tax and the other hidden money but to do that, they cut out what exactly is tax deferred overseas.

So it is a matter of evaluation and that needs an experienced experts. Our attorneys have experience to find a legal basis for deductible at the employer end and deferred income at the individual end…The trade comes down to income now, pay tax now, income later, pay tax later – pay tax later lowers your cost of tax over a 20 year period by more than 2/3rds

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