Moving IRA Accounts Outside of US Territories (continued)
According to expert tax planners, there is no truth to the popular belief that offshore trusts present viable vehicles for tax avoidance. IRS requires the submission of Form IRS Form 1040, Schedule B, by April 15 each year. The form serves as a report of all existing offshore financial account over which you have direct or indirect control. The latter denotes those that you own even if placed in the name of a legal entity you control, such as a corporation, trust or LLC.
US Treasury also requires the submission of Form TDF 90-22.1 annually by June 30 from any U.S. person who has “a financial interest in, or signature authority over bank, securities, or other financial accounts in a foreign country which exceeds $10,000 in aggregate value".
In fact, moving of IRA accounts to offshore units increases your visibility and exposure to IRS scrutiny, since numerous US income tax requirements related to transfer of assets and annuity transactions are in place. See IRS 575 Pension and Annuity Income – (find the link in this article’s reference section).
These include tax provisions for Transfers of Annuity Contracts, wherein the movement may be treated as tantamount to receiving a non-periodic distribution of the IRA account.
There is also the matter of observing the regulations pertaining to lump-sum distribution particularly if the IRA account is being moved to a non-qualified offshore account in a single tax year. Certain qualifying conditions have to be met for a transfer to be considered as not a lump-sum distribution.
A qualified distribution for Roth IRA, for example, is subject to the condition that it is made after the 5-year period, which commences on the first taxable contribution made to set-up the Roth IRA account; and that it is made on or after the owner has reached 59 ½ years of age. In fact, there’s a host of exceptions to consider in avoiding the 10% tax for non-qualified distribution.
Traditional IRA owners on the other hand, may have to pay 25% additional tax if a simple IRA is withdrawn or used before age 59 ½.
A retiree, who may be enticed by an offshore corporation to invest his IRA funds in a real estate property as a means to avoid offshore financial reporting, is not a foolproof tax avoidance guarantee. U.S. controlled offshore corporations are likewise required to submit their own reportorial requisites to support their income statements and balance sheet figures and your IRA investment may surface among those reports.