USING US RETIREMENT FUNDS TO INVEST IN GOLDEN VISA FUNDS

Individual retirement accounts (IRAs) are tax-deferred savings accounts intended to provide a source of income for retirement. Contributions to IRAs are made by the individual account owner and, depending on the particular type of IRA, by the individual’s employer as in the case of a SEP-IRA. The funds are held by a financial institution that invests them in traditional assets, such as stocks, bonds, and mutual funds.

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Much has been written in recent years about the increasing popularity of self-directed IRAs, which allow retirement investors the flexibility to invest in a broad array of investment alternatives not offered by most traditional brokerage firms.

Whereas traditional retirement accounts typically limit investments to stocks, exchange-traded funds, mutual funds, and bonds — and may use the term “self-directed” to connote that the investor, as opposed to a manager, chooses from among them — a true self-directed IRA can participate in almost any type of alternative investment, such as private equity, private lending, precious minerals, cryptocurrency, and golden visa funds to name a few examples.

While SDIRAs offer greater investment flexibility, they also require careful adherence to IRS rules.  If you’re unsure, please get advice.

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What is a Golden Visa Fund

The concept of a “Golden Visa fund” is closely tied to Golden Visa programs, particularly in Portugal, Hungary and Greece.

• Essentially, they are investment funds that meet the criteria set by the host government to qualify for their Golden Visa program.
• These funds typically invest in various sectors of the economy.
• These investment funds, can invest in things like:
  • Venture capital.
  • Private equity.
  • Technology companies.
  • Cultural projects.
• The goal of these funds is to drive investment into the Portuguese economy, in sectors that the government deems to be beneficial.
• The minimum investment into these funds, to qualify for the golden visa, does vary.

Key Considerations:

• Due Diligence:
  • Investors should conduct thorough due diligence on any fund before investing.
• Risk:
  • Like any investment, Golden Visa funds carry risk.
• Compliance:
  • It is very important that these funds follow all of the rules set forth by the relevant government, to ensure that the investor qualifies for the golden visa.

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Differences Between Self-Directed IRAs and Traditional IRAs

When funds are invested in a non-self-directed IRA, they are usually managed by a brokerage house that invests the funds.  The account holder can make trading decisions and direct the brokerage. The broker must also get the account holder’s permission to make trades—unless the IRA is held with a money manager who has discretionary power over the account.

With a self-directed IRA (SDIRA), which can be either a traditional IRA or Roth IRA, the account owner directs all of the investment decisions through a custodian or broker. As a result, the owner has a much greater degree of flexibility in choosing investment options. This option may also reduce the fees charged because the custodian isn’t involved in the investment transactions—only the investor.

The main difference between an SDIRA and other IRAs is the types of investments you can hold in the account. In general, regular IRAs are limited to common securities like stocks, bonds, certificates of deposit, and mutual or exchange-traded funds (ETFs).

But SDIRAs allow the owner to invest in a much broader array of assets—what are commonly called alternative investments. As such, an SDIRA requires greater initiative and due diligence by the account owner.

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Types of Self-Directed IRAs

Different self-directed IRAs cater to various investment needs.

Examples include:

• Traditional SDIRA: Pre-tax contributions with tax-deferred growth, paying taxes upon withdrawal.
• Roth SDIRA: Contributions made with after-tax dollars, allowing for tax-free withdrawals in retirement.
• SEP SDIRA: Simplified Employee Pension IRA, ideal for self-employed individuals or small business owners, with higher contribution limits.
• SIMPLE SDIRA: Savings Incentive Match Plan for Employees IRA, for small businesses and self-employed individuals, with an employer match component.

Fast Facts

• A self-directed IRA may be a little more challenging to set up than a standard IRA
• Not every SDIRA custodian offers the same range of investments. So, if you’re interested in a specific asset, such as golden visa funds, make sure it’s part of a potential custodian’s offerings.
• Remember that SDIRAs are self-directed, which means custodians aren’t allowed to give financial advice. As such, traditional brokerages, banks, and investment companies usually don’t offer them to their clients.

Alternative Investments for Self-Directed IRAs

Within the IRS restrictions, self-directed IRA funds may be used to invest in a diversified portfolio beyond traditional stocks and bonds. The owner of a self-directed IRA can invest in private placements, limited partnerships, tax lien certificates, and precious metals.

Self-directed IRAs cannot be used to purchase insurance instruments or collectibles.

IRA-Prohibited Transactions

Collectibles include a wide range of items, including antiques, artwork, alcoholic beverages, baseball cards, memorabilia, jewelry, stamps, and rare coins. This affects the kind of precious metal that a self-directed Roth IRA can hold. For example, an account holder can direct the custodian of the self-directed IRA to invest in the silver market but cannot order the purchase of collectible silver coins.

A popular investment choice for those with self-directed IRAs is real estate. Funds from the IRA can be used to purchase a foreclosed property, for example, which will then be held in the name of the IRA custodian. The self-dealing restrictions apply, though, prohibiting the account holder from living at the property.

Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person. Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant). The following are some examples of prohibited transactions with a traditional IRA.

• Borrowing money from it.
• Selling property to it.
• Using it as security for a loan.
• Buying property for personal use (present or future) with IRA funds.

The Internal Revenue Service (IRS) creates the rules for all retirement accounts, and all IRAs are prohibited from certain transactions regardless of the specific type of IRA. Account holders cannot take a personal loan against their funds or participate in other self-dealing activities, such as business transactions in which they or family members are personally involved.

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SDIRAs and Golden Visas

Points to consider may include the following :  

• Rolling your existing IRA into a self directed one – If you have funds in a retirement account that restricts your investment options, you can transfer or rollover those funds into a self-directed IRA. This process involves moving the funds from one custodian to another who allows for alternative investments. There are three methods for transferring or rolling over funds: Trustee-to-Trustee Transfer, Direct Rollover, and 60-Day Rollover. 

• Checkbook IRA or IRA LLC – An IRA/LLC consists of a self-directed IRA account (Roth IRA, Traditional IRA, etc.) where the IRA owns an LLC. A Checkbook IRA/LLC is a popular self-directed strategy offered by Directed IRA and provides several benefits.  A Checkbook IRA/LLC allows you to make investment decisions directly, bypassing the need for custodian approval of transactions. You can write checks directly from the LLC’s bank account, enabling swift management of your retirement funds. This structure allows you to act quickly on investment opportunities and provides greater control over managing assets that may require frequent transactions after purchase (e.g., a rental property or a property being rehabbed and flipped). 

• Ensuring that from a US point of view, the Golden Visa is not a prohibited transaction.  How so?  If it is connected to real estate, will you or a relative live there?  Some are also concerned about benefitting from residency or eventually citizenship can be viewed as self-dealing under the exclusive benefit rule.  Getting a written legal opinion may be useful.
• Given that the investment in the Golden Visa may come from an LLC and not you directly, would the government recognize the direct link?  Does the naming convention behind the LLC on the US side need to be a certain way?  What about the details behind the Unipessoal / LDA and bank account on the Portugal side?  Getting a written legal opinion may be useful.
• How should the Golden Visa fund be disclosed on your US returns.  We know it’s tax free to Portugal but not necessarily so to the US.  Do the PFIC taxes flow through to your personal returns? 

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Reporting Foreign Investments

The Self-Directed IRA or a Solo 401(k) plan (if you are self-employed) gives you the freedom to invest in alternative assets, including those outside the United States.

If you are using a Self-Directed IRA LLC, also known as a Checkbook Control IRA, to make a foreign investment, the question becomes do the exemptions found in FinCen Form 114 and IRS Form 8938 still apply?   Unfortunately, there is no specific IRS guidance on this question.  The exemptions specifically mention IRAs and 401(k) plans.  Would the IRS consider the exemption not to not apply because the IRA or 401(k) plan invested through an LLC?   Especially if the LLC is only owned by one retirement account and is considered a disregarded entity for tax purposes.  Would the IRS take the position that, from a tax perspective, the IRA or 401(k) plan should be treated as owning the foreign account and, thus, be eligible for the filing exemption under FinCen Form 114 & IR Form 8938.

Accordingly, if one is using a Self-Directed IRA LLC to make a foreign investment, the safest approach would be to file FinCen Form 114 & IRS Form 8938 or use a custodian controlled Self-Directed IRA where there is little question as to the applicability of the exemption for retirement accounts.  Whereas, in the case of a CFC, CFP, or PFIC investment, since no specific exemption seemingly applies directly to retirement accounts, it is advisable to file the requisite forms with the IRS based on the investment.

If you have a Solo 401(k) plan and have an interest in a foreign bank account with over $10,000 in assets or have made investments into a CFC, CFP, or PFIC, you should follow the rules outlined above.

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Taxes on Self Directed IRAs

With SDIRAs there is the possibility that some or all the income earned from a self-directed IRA investment will instead be subject to an immediate tax in the year it is earned. That can occur because of the treatment of the income generated by the IRA as unrelated business taxable income. In turn, the treatment of income as UBTI can subject the IRA to an unrelated business income tax.

Broadly speaking, IRAs are tax-exempt trust entities under section 408(a) of the Internal Revenue Code. Roth IRAs are also tax-exempt under section 408A. Generally, amounts held in a traditional IRA are not taxed until the account holder takes a distribution.On the other hand, owners of Roth IRAs can make tax-free withdrawals. The tax-deferred or tax-free nature of these types of entities (or any tax-exempt entity for that matter) is predicated on the notion that the income they earn is in furtherance of the tax-exempt purpose of the entity. For an IRA or other retirement account, the tax-exempt purpose is saving for one’s retirement.

Subject to numerous exceptions, qualified retirement plans, individual retirement accounts, charitable organizations, and other organizations that otherwise are exempt from U.S. federal income tax (collectively, exempt organizations) nonetheless may be subject to the unrelated business income tax on UBTI.Generally, UBTI refers to the gross income derived by an EO from a trade or business that it regularly carries on, the conduct of which is not substantially related to the exercise or performance of its exempt purpose or function, less allowable deductions directly connected with that trade or business.

Under section 512(b), income from interest, dividends, royalties, rents, and gains from the sale of property (other than property held for sale to customers in the ordinary course of a trade or business or that would be includable in inventory) are excluded from UBTI. For example, a self-directed equity investment in a real estate partnership that spins off rents would generally exclude those rents from UBTI. Similarly, gain produced from a sale by the partnership of the real estate that passes through to IRA partners would also be excluded.

There are always exceptions to income exclusions, which is true in the case of UBTI. One important exception to this general rule of exclusion relates to what is known as unrelated debt-financed income (UDFI).  UDFI is generated when a retirement plan (for example, an IRA) borrows money to acquire real estate. The term used in the IRC to describe this circumstance is “acquisition indebtedness.”  Acquisition indebtedness includes debt incurred to acquire property, debt incurred before the acquisition of property if the debt would not have been incurred but for the acquisition, and debt incurred subsequent to the acquisition of property if the debt would not have been incurred but for the acquisition and, at the time of acquisition, the incurrence of debt was foreseeable.

UBIT and UBTI rules are complex, and there remain some unknowns about whether they will apply in all circumstances, and to what extent. For that reason, it bears repeating that self-directed retirement investors should consult their own tax advisers regarding the UBTI ramifications and other tax aspects of these sorts of investments.

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