Another Look at IRA Assets

BY J. BEN VERNAZZA AND JIM BENNETT

“The Dos and Don’ts of IRA Investing” ( JofA, Apr.00, page 45), states that an IRA can’t be used to transfer funds overseas and that IRA owners should restrict investments to the continental United States. Both statements are incorrect.

First, investments in Alaska and Hawaii are certainly allowed, so “the continental United States” is too restrictive in that context.

Second, and more important, there are no restrictions whatsoever in either the regulations or the Internal Revenue Code, with respect to the physical location of IRA assets. Specifically, foreign investments are not included in the IRA prohibited-transaction rules. The only requirement is that a qualified U.S.-based IRA custodian or trustee be used. The investments themselves can be made anywhere in the world.

Additionally, an overseas IRA investment, when properly structured, can provide significant asset protection in states where IRA assets are not exempt from creditors. Practitioners should check with counsel in their states to determine whether IRA assets are subject to creditor claims.

J. Ben Vernazza, CPA/PFS
Aptos, California

Jim Bennett, Esq.
Dallas

Author’s reply: The letter writers make a good point—Alaska and Hawaii are, of course, considered domestic for asset investment purposes.

As for the comment on foreign investments, I stand by my opinion (having noted in the article “there isn’t extensive guidance from federal regulators”) that “direct” overseas investments are risky. There was no indication that indirect foreign investments are a problem. Perhaps I could have clarified the distinction between “direct” and “indirect” foreign investments.

It’s a dicey proposition to say that direct foreign investments are OK without referencing citations supporting that—for example, letter rulings, Department of Labor advisory opinions, court decisions or IRS regulations. Something more concrete, at least a letter ruling, is needed before recommending that a client make direct overseas investments. Simply noting there are no restrictions with respect to the physical location of IRA assets is not enough assurance—at least not for my clients.

There are conflicting opinions on the viability of transferring any assets offshore, similar to family limited partnerships in estate planning. The risk of a fraudulent conveyance must always be considered.

For readers who want to pursue this topic, here are some references: Title I of ERISA (it is inconclusive whether this section of ERISA covers IRAs; if so, restrictions apply to direct ownership of foreign assets); ERISA section 404(b); DOL regulations section 2550.404b-1; DOL advisory opinion letters 84-14A, 75-80 and 91-28A; and IRC sections 4975 and 1104.

Robert Preston, CPA
Danbury, Connecticut

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