If you owe a tax debt to the IRS, be aware that they can seize your IRA or other retirement account at any time. You must take steps early on to protect your IRA from the IRS.
This post originally appeared in LowTax.net
First, I note that State laws that protect your IRA from civil creditors DO NOT apply to the IRS. The U.S. government may seize or levy your retirement account for the full amount of taxes, interest and penalties owed, leaving you NOTHING. Compare this to other more reasonable countries (like the UK whose tax authority must leave you some money to live on), and you’ll find that U.S. is the only government on earth who may take what they want, without court action, and leave you penniless.
That’s right, the government need not go into court to take your retirement. The agent assigned to your case simply taps a few keys on his computer and a notice of levy goes out to your IRA administrator. He will sell everything and pay cash over to the IRS.
Adding insult to injury, you must pay tax on the levied moneys as if it were a distribution. For example, If the IRS takes $20,000 on June 10, 2015 out of your IRA, you are to report that as a distribution on your 2015 tax return when you file on April 15, 2016 and pay the tax by that date to avoid new interest and penalties.
- No early withdrawal penalty will apply to the levy. You need only pay the tax due. There is a special exception on Form 1040 for the 10% penalty.
So, how can you protect your IRA from the IRS? There is only one option: Move your IRA abroad and away from the U.S. custodian.
The solution is to move your IRA out of the United States and under your control. You can accomplish this by forming an offshore IRA LLC in a tax free jurisdiction like Belize and transferring your IRA in to that structure.
- An offshore LLC is required. If you use a Self-Directed IRA to purchase foreign real estate, that property is under the control of your U.S. custodian. If the IRS issues a levy, the custodian will sell your property to pay Uncle.
Your retirement account retains its tax attributes/benefits and you must follow the investment rules. You become the manager of the account and the only signor on the offshore bank account.
In this way, the custodian is out of the picture. He has only two responsibilities: 1) to invest your retirement account into your offshore LLC, and 2) file tax reports each year. Once that job is done, he has no say over what happens to the cash.
As I said, you must follow the IRS rules for a retirement account. This means you may not invest in real estate and live in it, can’ buy collectibles, and may not invest in life insurance policies. Aside from these limitations, you are free to make just about any investment that is in the best interest of the account. As the manager and fiduciary, all responsibility is shifted to you.
If you decide to invest in real estate (rental properties only) and physical gold stored in a vault in Panama or Switzerland, that’s your choice. You have a right to diversify and invest as you feel is most advantageous.
I hope this post on how to protect your IRA from the IRS has been helpful. For more information on going offshore, please see PremierOffshore.com.