Talking Expat Taxes #9

Thank you. Appreciate you having me.

So currently I am the director of Equity Institutional, which is a self directed IRA custodian, custodian for different assets. We've been around for about 50 years and help just shy of a half a million account holders diversify their retirement accounts through mostly alternatives. Some people still look into traditional assets, but most of our clients come to us to truly diversify, get into some alternative investments. I got into it really through some real estate investing. I did financial advising before. So I've been financial services for over 10 years. It's just a little hard to recommend some mutual funds and stocks when you know these alternatives out there, they're a little more exciting, get. You know got me excited into this industry. I do some real estate investing on the side as well this is a way to merge it to a little bit of the financial services world with retirement funds and then also getting into like I said, what else is out there in the investment space?

So that's how I got into it and most of my day now is just talking to clients who want to know how to position those tax beneficial accounts they have with retirement accounts and get them into some different types of asset classes.

Yeah, so it's a cool lingo we use for the industry. Mostly we define alternatives is not stocks, bonds and mutual funds. And then if we want to send a little bit more also assets that are allowable in retirement accounts. The only thing that's not really allowable in a retirement account is life insurance and collectibles. So the IRS says you can't invest in life insurance because it already has its own tax beneficial statuses. And then collectibles is a little bit of a gray area.

The examples I always give is antiques, paintings. That's what we'd be considered collectibles, trading hard collections and so on.

I think that's part of it. I've always been explained that it's valuation issue as well. It's hard to put a value on priceless pieces of art you know where most assets we can get at least a hard asset value or a marketplace value. It's a little bit harder in the collectible world. You I mean, that was a lot of it was written in the 70s.

Now we have more of a marketplace for those things. So yeah, there's some justification and there's ways of structuring some investments that you can get some exposure into that world, but for the most part, you can invest in anything.

Or we've seen groups that will structure it. They'll create an entity and the entity goes and buys it. But like technically the retirement accounts directly invest in the entity. So that's one way of still getting exposure to that asset class, but maybe structuring in a way that keeps the federal government happy there as well. Which is most of ours is dotting eyes, crossing T's to make sure the retirement account stays in good standing.

You still get that tax benefit of those accounts while doing some of these investments that aren't as institutionalized as stocks, bonds, mutual funds.

Yeah, real estate and gold probably are the top two that come into mind. They've really grabbed on to the self directed retirement accounts. That's probably what we see the most of. My division, our specialty is basically private equity, private debt. And a lot of those still involve real estate and different things, but yeah, we've seen people purchase real estate internationally, domestically. Gold is always you'll see, use your retirement account to buy gold, like commercials on TV.

That's what they're referring to. And then obviously, like you mentioned crypto in the last few years is growing quite a bit for retirement accounts as well. That's what we see the most of.

So currently the industry is structuring it in ways where we try to keep a third party involved. And while we're doing that is there is no guidance right now on crypto in retirement accounts. Catching up on crypto and a lot of spaces, but they're really delayed on retirement accounts.

Yeah, I say there's a risk for any asset class. Technically. The rules that I'm talking about have been in set in place since the seventies. So this is when IRAs were established. That's where self directed retirement accounts. So there hasn't really much been changed there. We'll get some case all every once in a while that speaks to - Hey, this is how you hold certain things. So we're treating it like precious metals. There's been a lot of case law on precious metals and essentially how that's treated is you can't take personal possession. If you buy gold in your retirement account, you don't hold it in yourself. You don't hold it in your own safe.

You have a third party depository. So if we've treated crypto similarly where we're saying, Hey, you should have a third party wallet provider, a broker, someone involved that can do your storage, so you're not self storing. We would recommend someone not even think about like I said, you deposit boxing like that, treat it basically the same way that. We've treated gold previously. So in most cases, there's, there is a third party involved that's going to do the storage piece for the IRS.

So one reason the questions come up so much about real estate is some of the other investment types are just really easy. You're going to invest in a private debt and a private equity fund. It's pretty much set. Forget it. You're done. There's more rules that come into place with real estate.

Few more moving pieces and just some things to keep in mind. I'll walk through the Panama. If you're an expat investor who had, an old 401k, let's say you worked for a long time, contributed to this 401k plan. You've retired from that job, and now it's time to invest and buy hard asset in Panama with this retirement funds to continue to grow that, or, to start withdrawing. Somebody would then open up an IRA account with a company like ours, they can roll part of that 401k over all of it, how much they need to, when we're buying properties in the domestic United States, they can either buy it directly from the retirement account.

Or they can set up like an entity to manage it or to hold ownership. When we're looking internationally for practical reasons and for some other reasons, depending on the country looking to buy in, we require an entity to be set up to hold that property. Sometime for the custodian, it's nice practical because we need to sign closing documents on behalf of the client, work with, the title company and that just can be tough on the international side.

Which brings the next reason the entity is almost always needed is, depending on what the country you're purchasing in they may not recognize the US Retirement account. They may want a local entity, set up by that country to own the property. So we rewind to the client who retires at the account here, if they wanted to purchase a Panama, they could set up a US LLC, a Panamanian entity, an international business company.

However, they want to set that up. The IRA account can be 100 percent owner of that entity. It could be a 50 percent owner, 10 percent owner. That's structuring doesn't matter. They can fund the entity and then purchase the property. If it's for some simple answer just a rental property it operates through that entity.

So rental income gets deposited into that entity. If it needs a repair and expense the entity can pay that from like an operating bank account. We don't have to be involved at that point the investment can just operate on its own. Depending on the situation, it can get a little complicated, as I mentioned, if you're splitting ownership or whatnot, but really on the US side, it's still a retirement account investment.

The retirement account owns part of that entity. The only time you have to transfer funds back to the retirement account is if you want to transfer to a different retirement account or start taking income personally. Cause then our job is to do the proper tax reporting. Or for the distribution, the retirement account.

So if it's traditional IRA, you pay taxes on just what you pull out. If it's a Roth IRA tax free on those withdrawals, but we do that reporting. As long as the funds stay in the retirement account, just retirement account based as long as the funds stay in the retirement account, there's no tax implication then.

So you sold that property, made a really good profit. The funds can be sent back to that entity's bank account, back to the retirement account. No tax implication on the U.S. side. There could be some international thing where you purchase. There might be some taxes on that side, but at least for the US side, you keep that tax benefit of the retirement account.

You'd want to set up in the name of, yeah, you wouldn't have a personal account. You'd want to set up an international account in the name of the company.

Correct. Yep. Yeah. You just want to send to a personal account because that could look like a distribution

The important thing, this is where it should be investment real estate definitely for the time, at least it's owned in the retirement account.

No personal use. The IRS does prohibit any personal use. It's not like 1031 exchange or some other things where they do allow some. Retirement account allows no personal use while it's on the retirement account. And then self dealing can come into place where you, your lineal descendants, what we call prohibited parties, can't personally benefit from that property.

You couldn't rent it out to your children, grandchildren, spouse. They can't directly benefit. That also would mean you can't personally receive income that should have went to your retirement account. So it's like a dual purpose in the personal benefit.

Yeah. Yep. It's the retirement accounts home. Your benefit is growing the retirement account, creating wealth for you that way. Some people, if you have some time to plan for it, you can plan for it to be your retirement home later. So you use the retirement account to investment now. And then if okay, once I'm retired, I can remove this from the retirement account.

I can transfer ownership over. Then you can use it personally once it's out of the retirement account. But while the retirement account, even if the retirement account just owns 1% of the property, you can't use it personally.

Yeah, something like that. So the easiest one because yeah, we get that question quite often what we're saying is yes, if you have the cash available in the retirement account. That's the easiest one, have the retirement account pay that expense. Say that's not an option, we go into option two.

Yep. Yep. So retirement accounts are eligible for loans. You can actually take a loan, your retirement account can take a loan out. It has to be a non recourse loan, no personal guarantee. You can't put your own personal collateral up. Essentially, they're lending to the retirement account. There may or may not be the only...

Yeah, you can you can. We'll get to that. So that is the very last option.

Yeah, the second one will be if there's no institution that can lend you the money. So there's no bank or anything that'll send you the money that way. You can then try and get a personal loan from a non prohibited party.

So not a lineal family member. You could go aunt, uncle, cousin, business partners, possibly as long as they're not a prohibited party to the retirement account, you could borrow money from them to pay this expense and then pay them back later. If we've crossed all the bridges and there's just nothing here.

There's a possibility like if it's going to basically the property is going to be in desolate you're going to lose the property for whatever reason, we have had people that have just done it personally and then you know paid it back that way. Basically once you've checked every single box and there's just no, it's basically I'm going to lose the property or you know because tax bills are coming up pretty often too, we're like - oh I need to pay the tax bill, like I have nothing to pay the tax bill, what can I do because the only thing I'm into crunch. Sometimes people are not eligible to put more money into the retirement account in the future.

Yeah, so it is nice to actually keep reserves for those expenses. But yes, if it came down to it basically, the county is going to take it back. You can do it that way.

Yeah, it's just we try to exhaust all the options before we get to that point.

So And review what that is for the audience as well.

So at certain ages, I think it's 72 currently. It was 70 and a half and I think it's 72. So whenever you're listening to this, it can obviously keep moving. You're required to start taking some of those a percentage of the retirement account out. As distributions as income and that's normally a small percentage of the first couple of years, but it grows pretty quickly.

It may only be, I forget the first year, but like a one, one and a half percent, 2%, but eventually you have to keep taking money out of this retirement account if you don't have any liquid assets. So eventually you've exhausted all the liquid assets and all you have left is the real estate and the retirement account.

You can start taking in kind distributions of the real estate to satisfy the RMD. You can technically do this at any point, but it probably makes sense to pull from easier liquid investments first. Cause what the in kind distribution of the real estate, if we have an entity, essentially you're transferring ownership of the entity to yourself personally, which is a taxable way.

If you didn't own the real estate and entity, you're re-deeding part of the property to you personally that involves getting to.

Yeah. Yeah. Yeah. Yeah. Because it's a taxable event. We do need someone to evaluate what the market value is at that time that you take that out.

That's why it's always nice. If you can pull from cash, liquid assets, stocks, bonds, mutual funds that are easier to sell, and then the real estate is always the last option. And then, yeah, you could transfer as little as 5 percent of the ownership to you personally. At that time, and that satisfies the RMD.

No cash is actually exchanging. So you're not getting cash sent to you. You're just changing a part of the property ownership to you personally.

Yeah. And to your example, if it was a million dollar profit and you only had to pull out a thousand dollars, you only get taxed on a thousand dollars. You made a huge profit on this property, but you only get taxed what you pull out and you have flexibility on how you want to pull the funds out. So those are really the benefits is just kind of tax flexibility.

And you're probably about the distribution. If you live long enough, then that might become an issue. Even if you planned a very diverse portfolio if you live long enough, that's a possibility for anybody that might be the last asset that stays in a retirement account.

Yeah. So to answer your question, the spouses, you do have the option as a spouse to take over it as your own.

So normally in the unfortunate event that your spouse passes away, the custodian should give you an option. Do you want this as an inherited IRA or do you want to take it as your own retirement account? I want to advise on what you should do, but if you do the inherited route, you're right. It's 10 years right now is the current rule.

Sometime in the next 10 years, all the assets had to be at that retirement account. If you take it as your own, it's only subject to your

Your own RMD, yeah, exactly. But you're right. If it's anyone other than your spouse, essentially, you have 10 years from when you inherit that account to get all the assets out.

So you have 10 years to try and play. How much should I take out? Whether I do straight 10 percent? Do I wait till year 10? If the valuation might drop one year, it might make sense. It's hard to say what to do in that 10 years, but you're right. It takes a planning to make sure you do it the most efficient way.

Yeah, so we're not a direct custodian. We're not financial. So we actually can't direct them on what to do. I would say, 90-plus percent of the clients come to us. They already have their investment in mind, whether they just know generally what they want to invest in, or they actually know exactly what they want to invest in.

And then we facilitate from there. We say, okay, this is how you should do it. If. The structure is what they're all say to satisfy, keep your IRA in good standing. This is how you should do it.

Yeah. Correct. Yeah. We were just the custodian, the operator, but they actually picked the, you're a bigger investment. That's where the self directed term comes from. It's really a marketing term. It's not really any different, but you take your own investments and we don't get to tell you what to do at that point. As long as it's within federal guidelines, it will help you on how to do it. And yeah, and then obviously people have always had interest in, if they have a private equity fund is the example they want to invest in.

They've mentioned IRAs. There's pretty easy ways that we can get them in something like that. That's pretty simple. The real estate always just comes down to, okay, what's the plan for this? If it's a buy and hold rental property is a fix and flip what kind of what are the plans for it? We have those conversations just to make sure it's done correctly.

Correct. Yeah. After you've purchased an asset personally you can't have it after the fact put into a retirement account.

You would set the retirement account. For real estate purchase, that's one we'll work with the title company, make sure that on the deed, it lists the retirement account ahead of time. Cause you can't after the fact put it in. So yeah, you would want to move those ones over from the brokerage account to purchase the asset.

So it always helps to get the account set up beforehand. If you think in the event, you're going to purchase this.

Correct. Most people fund accounts with us from already existing retirement accounts. So you can make contributions, but like you said, there's limits there.

Exactly. Yeah. Some asset classes have lower minimum, so we'll see. You'll make contributions depending on what they're trying to get into. But yeah, generally if you're buying real estate, you've probably had a an IRA or a 401k that you're looking to use.

Especially real estate. It really helps to have a plan ahead of time. So so many times we do that. People are like, I'm buying this land. You're like, okay, you plan to develop the land? Is this going to be, you know, just hold it like having a plan and knowing an exit, probably having a backup exit plan, too. Because we mentioned, if you're planning, oh, we're gonna live in this one day.

That's gonna take a Plan on when do we take distributions and so on, just knowing it. And it's real estate specific, but like I said, real estate's one where it does help to have kind of the details flushed out at least a little bit on how we're going to purchase it, what our long term plans are.

Those plans can change, but it just helps to know that ahead of time. Because the IRA does have its rules. You don't want to buy something and then have to change your plan and maybe without the confines of the other asset classes I mentioned. They're pretty simple. They're, they're really easy.

It really takes the one where it just takes, having a good conversation and kind of knowing what we plan to do ahead of time.

Yeah, I'll provide all contact information, email, phone number, is all be available. But I'll throw my direct number anyways right now, but it's 239-333-4461. I'll provide my email and you can set something on my calendar. We can talk about it, different investment plans you have.

Thanks. Yeah.