With the dwindling dollar and April 15th lingering everyone is thinking of ways to save money, protect their assets, increase investments, and avoid taxes. Surfing the internet you find all kinds of articles, some legitimate and others not so much, telling you how you can increase your investments, maximize your wealth, protect your assets, and avoid taxes. The advice you receive will depend upon which type of advisor you have; if you have an APS™ rated advisor rest assured that your estate and financial or, at this time of the year, tax planning will include methods for all of the above.
As an entity sworn to protect the public and educate its members and advisors we thought we would take some time to warn you of two of the major scams this past year. I am sure many of you have read the IRS Top Ten list of Tax Schemes for 2008. If not, you may read about the Dirty Dozen here , or see, IR-2008-41.
Two of those tax schemes that we thought we should mention were Hiding Income Offshore and Abusive Retirement Plans, #5 and #6 respectively.
Hiding Income Offshore:
However, when we say Global Asset Protection we are not talking about moving all of your money offshore. We instead mean that clients with wealth should protect their money/assets from “all” creditors. Creditors such as: the IRS (income, estate, dividend and capital gains taxes), divorce, a declining stock market, long-term care expenses, etc.
While most of you who read our newsletters already know this, we want to remind you that U.S. Citizens CANNOT avoid taxes by hiding their income offshore. U.S. Citizens are taxed on their worldwide income no matter where the citizen is located and no matter where the income is coming from.
Having said that, if you can use a domestic structure to avoid and/or defer taxes, you should be able to use that same structure offshore (the classic tool being an international private placement life insurance policy to hold and grow cash tax-free).
Abusive Retirement Plans:
#6 on the IRS’ Dirty Dozen was abusive retirement plans. The IRS warned taxpayers about improper contributions to their Roth IRAs.
The IRS is looking for taxpayers who are using methods to avoid contribution limits to their Roth IRAs.
The 2007 contribution limit to the Roth IRA is $4000 with a $1000 catch up allowed (for those over 50).
The IRS is warning taxpayers to stay away from advisors who counsel clients on shifting highly appreciated assets into the Roth IRA or companies owned by the Roth IRA at less than fair market value.
The following fact patterns indicate what the APS™ and IRS are warning against:
1) Client sets up a Roth IRA (or Roth 401(k)); and, then the client manages to get a company’s private stock that will generate significant income into their Roth IRA or 401(k). If the client owned that stock personally, the income from it would be taxed today at an ordinary income tax rate. However, if the client can figure out a way to get that stock into a Roth IRA or 401(k) plan, the income is not taxed today and will be allowed to grow tax free and then will be accessible tax-free in retirement.
This is more plausible when converting an existing IRA to a Roth, paying the taxes and then having significant money in the Roth IRA to buy private or public stock.
2) The other fact pattern is somehow moving a low-basis asset into a Roth IRA or 401(k) plan at less than fair market value. For example, let’s say a client converted a regular IRA to a Roth IRA (upon conversion, unless done in 2010, there will be a tax due on some or even a good portion). Then the Roth IRA would use the money to buy at less than fair market value a low-basis asset that should highly appreciate in the coming years (real estate or stock).
The client is in essence moving an asset he/she believes will highly appreciate in the near or distant future which would generate significant capital gains taxes when sold 3-5-10 years down the road. Because the asset is owned by a Roth IRA or 401(k), there will be NO capital gains taxes when due (and the money after the sale can be invested tax-free and removed tax-free).
As an entity that watches out for and warns the public against scams that will not protect their assets but will deplete them, we thought we should remind you to read or re-read the top-ten list of Scams put out by the IRS and to be particularly careful about the two Scams discussed in this newsletter, to do so, please click here.
While the sales pitch by promoters is powerful (avoid taxes and grow your wealth), you do not want to play games with contribution limits of ERISA governed plans. It’s a sure-fire loser and a game you can’t win.
Congress set contribution limits (in their infinite wisdom) at fairly low levels. Those that try to circumvent this by playing games as discussed in this newsletter will surely regret it and we recommend you stay away from such plans. Any contribution above the statutory limit, $4000 in 2007, will subject you to a 6% excise tax until the excess contribution is eliminated.
As mentioned in the scenario above, please be sure and remember that if you shift highly-appreciated assets to a company that is owned by your Roth IRA you are effectively transferring that highly-appreciated asset to the IRA and are subject to the same 6% excise tax mentioned above.
The APS™ is here to help you. If you are looking for an advisor who you can trust, is concerned with asset protection, and estate and financial planning done competently and correctly please click on the “locate a rated advisor” tab.
Jason K. Ruggerio, J.D.