Set-up a Foreign Account for Your U.S. IRA without Unrelated Business Income Tax (UBIT) or (UBTI) distribution tax problems
If you search around on the web, you will find that there are many companies offering Self-Directed IRAs. You will find little actionable information on government regulated, registered and recognized foreign pension funds, investment accounts or brokerage accounts. You will find those who want to sell you overseas real estate or storage facilities for commodities. Those are assets which have no market maker nor the ability for you to time your liquidity. The definition of retirement income planning includes the requirement for liquidity.
A Self-Directed IRA is where you place your IRA with a custodian and he agrees to take your suggestions and investment requests under advisement. He generally offers a wider range of investment options than a traditional IRA. With a Self-Directed IRA, you direct your investments but you can’t force your custodian to make an investment for which he is not comfortable.
Some plan trustee’s will refuse to make transfers outside the USA. In regards to a U.S. investment advisor they would have liability if your investments go south because FINRA rule 3040 has restrictions that prevent dealing in investments outside of his firm. It is his responsibility to advise investments and he is either not capable or not willing to perform the due diligence necessary to make an informed decision on a foreign investment.
Legal difference between a distribution and a contribution
Combining two different legal transactions. One transfer is completely neutral because it is a transfer to a self-directed IRA Trustee and that is not treated as a distribution. The second transfer is treated as a contribution. Therefore, so long as the 402(b) is constructed properly there is no UBIT and there is no UBTI distribution tax problem. Underlying that is the legal analysis that it is not deemed a distribution it is a contribution.
Whether there is a Double Tax Agreement (DTA) or not makes no exception to this U.S. domestic tax law. Therefore, if someone were to say, ”That the DTA says the transfer is not a deemed distribution” then that statement is incorrect. A DTA is not designed for International pension transfers it is designed to deal with transfers within a jurisdiction between qualified plans. For example: A transfer from a U.K. pension to a Malta pension (the U.S. has a DTA with Malta) from the U.S. tax point of view you have caused an event that has crystallized your rights and that causes a tax charge.
The U.K. calls it a Benefit Crystallization Event (BCE)
Once the structure is in place, you can invest as you see fit. The only limitations are:
• No collectables,
• No life insurance policies,
• No self-dealing – you must invest for the benefit of your IRA and not take out any money other than as scheduled distributions,
• You may not invest in a business if you own more than 50% of the company or you are a highly compensated employee of the business.
The Rules of a Self Directed IRA
Remember that you are managing the investments for the benefit of the IRA and must always do what is prudent for a retirement account. You must also manage according to IRC 4975 investment restrictions, disqualified persons, prohibited transactions rules to include your not being considered by the IRS as being your own custodian. A violation of IRC 4975 would void the tax benefits.
In a Self-Directed IRA the Trustee takes on IRC 4975 responsibility One simple key to success is to avoid self-dealing. You must have a U.S. IRS approved IRA custodian / trustee between you and the IRA.