In Part I, "The Danger," I explained the wide investment freedom you can achieve with an IRA structure that not one investor in a thousand knows is possible. It's the Open Opportunity structure, which is an IRA that holds a single asset – a limited liability company (LLC) that you manage. Because you are the LLC's Manager, with your own hands on the LLC's checkbook and with full authority to act when you see a profitable opportunity, your IRA can invest in just about anything.
That investment freedom has obvious implications for profitability. You're not limited to stocks and bonds. You can go wherever you think you'll get the best return. You can run your IRA more like an business and not just an account for passive investments.
And investment freedom has not-so-obvious implications for safety. Open Opportunity IRAs make up less than 1% of the IRA universe. So if and when a team of Congressional staffers or a group of Treasury Department bureaucrats get busy drafting up new rules aimed at skimming a few hundred billion dollars from IRAs, Open Opportunity IRAs probably won't be part of their thinking. The new rules, whatever they might be, could turn out to be ineffectual when applied to Open Opportunity IRAs.
A Foreign Company for Your IRA
There is a further way the Open Opportunity structure can get your IRA out of harm's way. The LLC that is inside the IRA can own a foreign company that you also manage. The foreign company then would own the investments you want. This could add more protection against any new program for the Government to dip into your IRA because the foreign company, being foreign, wouldn't be subject to U.S. laws. And shares in the foreign company would be illiquid and hard to value, whereas any new rules are likely to assume that IRA assets are fully liquid (easy to value, easy to sell) – an assumption that is correct for 99.9% of all IRA wealth but that would be way off base for a foreign company owned by an IRA.
There are two foreign company strategies that work well with an Open Opportunity IRA, and each gives you an extra benefit of its own.
Foreign holding company. The foreign company that's inside your IRA could be an LLC formed offshore that you use as a holding company to buy and own the investments you want. The extra benefit you get, vs. using an LLC formed in the U.S., is a much warmer welcome from foreign financial institutions, which can lead to still more investment choices and better profits.
Most foreign banks and brokers have become shy of dealing directly with U.S. citizens. They are terrified of getting entangled in the legal machinery of U.S. financial regulation and taxation. So when an American knocks on the door, they're inclined to say "Nobody home." Using a foreign LLC goes a long way toward eliminating that problem. A foreign bank, broker or mutual fund takes a lot of comfort in knowing that it is dealing with a non-U.S. company, even if the company is beneficially owned by an American, through his IRA.
Foreign operating company. The second way to use a foreign company inside your IRA is to operate a business through it. If the work you do now has – or could have – an international dimension, you may be able to do that work for your IRA's foreign company in a zero-tax or low-tax jurisdiction. Dividends the foreign company pays would flow to your IRA, where they would be tax-deferred or, in the case of a Roth, tax-free even when you take the money out. For example, if you are considering building an internet business, you could be build it inside your IRA's foreign company. If the company keeps all its activities outside the U.S. and resides in a zero-tax jurisdiction, the business itself will be tax free. And when the company pays the profits to your IRA, that income would stay free of current tax.
An Open Opportunity IRA is remarkably – surprisingly – versatile and full of advantages. It can even lop a big chunk off the tax cost of converting a traditional IRA to a Roth IRA. And that's the focus of Part III, "Saving Big on A Roth Conversion."