Set up an Offshore Self-Directed IRA (LLC)
- Last updated on . Written by Offshore Protection.
Those looking to take greater control of their IRA and invest their funds in a foreign jurisdiction have two primary options: they can set up an orthodox self-directed IRA with a custodian which permits offshore investing, or they can form an offshore LLC through which to invest their self-directed IRA.
In this article, we will explain what a self-directed IRA is and how much control it actually gives you. We will then discuss the use of an offshore LLC for your self-directed IRA, including how it works in practice and how it can be of benefit.
What Is a Self-Directed IRA?
A self-directed individual retirement account (IRA) is simply a retirement account which has been placed in the hands of a custodian which allows you to ‘direct’ the investments that are made on your behalf. This differs from a conventional IRA that is managed by a custodian which does not allow you any personal control over how your retirement funds are managed.
It is easy and affordable to make the shift to a self-directed IRA, as it only involves transferring your account from one custodian to another. It is important to note though that, even in the case of a self-directed IRA, you do not have total freedom over how your funds are invested. The custodian will still be required to follow all the same rules which apply to ordinary IRAs, which govern how and where funds can be invested. Therefore, you will only be able to choose how the funds are invested within the limits of the fund rules.
Furthermore, the custodian is not obliged to adhere completely to your directives. They will take your requests under consideration, but still ultimately have the final say about how the funds are invested.
Can You Invest Offshore?
Not all custodians are comfortable and experienced in dealing with offshore transactions, so having a self-directed IRA does not automatically give you the freedom to move your funds offshore. You will need to find a custodian who is willing and able to invest your funds offshore. Once you have found the right custodian, and insofar as the offshore investments adhere to the fund rules, you can indeed invest your self-directed IRA in a foreign country.
How Do You Set It Up Offshore?
It is possible to establish an offshore LLC through which to manage your self-directed IRA. This involves having your custodian invest the entirety of your IRA funds into an offshore LLC which is managed by you. This can provide a much greater level of control and freedom that an ordinary self-directed IRA.
The process of forming an offshore IRA LLC is relatively straightforward:
- Transfer your IRA account to a custodian that provides offshore IRA LLC structures. There are many custodians who will permit such a structure and facilitate the process.
- Incorporate an LLC in a beneficial offshore jurisdiction that provides tax efficiency, privacy, and good asset protection mechanisms. Popular choices include Cook Islands, Nevis, Panama, Hong Kong, etc.
- Ensure that the IRA account itself is the owner of the LLC, whereas you would be named the investment advisor and/or fund manager.
- Open an offshore bank account in the name of the LLC.
- Have your IRA custodian invest your entire retirement funds into the LLC, giving you full control thereafter.
Once you have established your offshore self-directed IRA LLC, the custodian of the IRA becomes almost redundant.
The custodian performs only two basic functions:
- US tax reporting
- Transferring the retirement funds into the LLC
Once the funds are transferred to the LLC, the custodian plays no active role in the day-to-day management of the funds. They do not charge any investment advisory fees, and have no control over how you choose to invest the funds.
As the manager of your own Offshore IRA LLC, you are required to follow the same basic rules as any investment advisor managing a retirement account. This involves always acting in the best interest of the account itself, and avoiding self-dealing at all costs.
The main rules are as follows:
- It is obligatory for a US licensed IRA custodian to make the initial investment from your IRA to your offshore LLC.
- The custodian is responsible for reporting the account activity to the IRS annually. They should do so in the form of an annual report to the IRS, along with an annual valuation of the IRA. They should also manage any State filings as needed.
- The LLC must be owned by the IRA itself.
- You are not the owner, meaning you cannot borrow money from the structure, and you cannot use the IRA as collateral.
- You must ensure that proper records pertaining to the use of funds and investment returns are maintained.
- Certain investment classes are prohibited, including life insurance contracts and collectables such as artworks, stamps, and coins.
- You may not lend the funds to yourself or any other disqualified persons which include close family and businesses that you own.
Pros and Cons
What Are the Benefits?
The most obvious benefit of managing your offshore self-directed IRA through an LLC is that it gives you complete control over the investments. You do not need to obtain the approval from the custodian when investing the funds, and have immediate access to be able to take advantage of investment opportunities as you see fit.
This allows you to tailor your IRA investment strategy to your own personal needs. It also allows you to invest in asset classes such as cryptocurrency, ICOs, precious metals, foreign currencies etc. Often, using an LLC is the only effective way to move your IRA funds to an offshore jurisdiction and take advantage of the benefits and opportunities that it offers.
Other benefits include:
- Reduced Administration and Fees: The custodian of the IRA plays a minimal role in the case of an LLC structure, meaning you will save significant amounts on the associated processing and advisory fees.
- Faster Transactions: A self-directed IRA LLC allows you to establish “check book control”. This means you have direct control over the fund allocation, and have the freedom to transfer funds into the LLC on behalf of the IRA without waiting for authorisation.
- Limited liability: LLCs provide limited liability protection, along with privacy and asset protection mechanisms which can benefit the fund, and ultimately you as the beneficiary.
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What Are the Downsides?
The main advantage of an offshore IRA LLC can also be its primary problem in some cases. This is the fact that you are in complete control over the investments in the fund and therefore solely responsible. You will not have the ongoing support and advice of the IRA custodian, and must take responsibility for understanding and adhering to all the fund rules. For a less experienced investor, or one who does not have the time and energy to be responsible for ongoing management of the IRA funds, this can in fact be a serious downside.
The other issue with the offshore IRA LLC structure is that it involves an initial setup cost which is not the case with an ordinary self-managed IRA. The cost will vary greatly depending on the jurisdiction in which the LLC is incorporated, along with the LLC’s bank account. Typical costs can be as much as a few thousand dollars. Therefore, this type of structure is usually only worthwhile for larger IRA accounts of around $100,000 or more.
If you are looking to maximise the returns and benefits of your IRA by investing it offshore with full freedom, then using an offshore LLC structure is certainly the way to do it. An offshore self-directed IRA LLC will give you the utmost control over your retirement funds, and enable you the freedom to invest them in the way that you see best. Furthermore, choosing to keep your self-directed IRA LLC in the right foreign jurisdiction can help to optimise your returns, reduce taxes, and provide additional layers of asset protection.