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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10149
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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ERISA attorney specializes in qualified pension plan: A

Customer Question

ERISA attorney specializes in qualified pension plan:
A pension client, 59, who is pension trustee and plan sponsor of a defined benefit plan-- purchased real property in Cabo San Lucas, Mexico as plan investment in January 2015 under the guidance of the plan language of IRS-preapproved prototype with 70% of the plan asset--all of which is vested in him.
2 questions came up:
1) Under Pension Protection Act ( PPA), since this real property is fully vested in him, while remaining balance (30%) of liquid plan assets as present value of accrued benefits, would be more than adequate for distribution to other much younger partially vested participants, if terminated—could he roll this illiquid assets over to an IRA using a LLC management?
2) Because this could be considered offshore asset, is there a conflict with Stop Tax Haven Abuse Act (HR 297), even though plan assets become taxable to US Treasury upon distribution ?
Submitted: 10 months ago.
Category: Tax
Expert:  Lane replied 10 months ago.

I hold a JD (Juris Doctorate, a doctoral degree in the law), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS designations. - I’ve been providing financial & tax advice since 1986.

I can help here

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Hi, I can help here.

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On your first question, this isn't a DB (Defined Benefit) plan where liquidity and funding requirements are actuarially determined along the way, this is a DC plan, so the was RMD is facilitated (the only effectively "REQUIRED" liquidity need) by liquidating the property when it's time (or before) to make those RMD's or any other retirement distribution

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On the second question, yes, form 8398 would be used here to report the foreign asset (just as any IRS owner would need to report stocks traded on a foreign exchange - unless, of course, facilitated through ADR's or a mutual fund that invests in foreign assets and does that reporting for the fund).

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IN terms of the rollover, the law certainly allows ... but you must be very careful about whether the custodian can facilitate the LLC/Real estate. There have been a COUPLE of cases where the rollover wasn't handled as a direct transfer AND the individual didn't know until too late that the custodian either didn't allow, or handles badly by no doing an direct retitleing of the real-estate from one IRA to another.

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I speak to at least an IRA owners a year who took a distribution from an IRA and used those funds to buy real estate (or some other alternative asset) thinking that the real estate would still be owned by their IRA and that the funds would not be distributed and subject to tax.

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The confusion usually arises with the non-self directed custodian who misunderstands what the the account owner is trying to do (invest the IRA, not distribute it).

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And of course, to state the obvious, the owner will need to (should have been) follwing all of the rules around "no self dealing, personal use, etc., etc.

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I'll put up a short list here (guessing you understand this piece already)

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Prohibited transactions generally include the following transactions:

  • a transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person;

  • any act of a fiduciary by which plan income or assets are used for his or her own interest;

  • the receipt of consideration by a fiduciary for his or her own account from any party dealing with the plan in a transaction that involves plan income or assets;

  • the sale, exchange, or lease of property between a plan and a disqualified person;

  • lending money or extending credit between a plan and a disqualified person; and

  • furnishing goods, services, or facilities between a plan and a disqualified person

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Sorry for the data dump, but many mistakes have been made in THIS arena.

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But to recap (1) No liquidity testing other than the need to satisfy RMD's or any required distributions (unless of course the individual wants to distributer after 59 and 1/2 and simply pay tax on the growth all in the year distributed), and

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(2) Yes, Foreign account reporting must be done by IRS custodians who invest in foreign assets.

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Let me know if you have questions

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Lane

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Expert:  Lane replied 10 months ago.

Sorry ... just saw that you said DB plan .... VERY atypical.

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You're question, as it relates to younger participants is good.

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The specific answer should come from an enrolled actuary ... but if your assumption is good ... that liquidity is sufficient, then he's fine .. (remember, however, that part of the formula will be an assumption as to the need to pay out for termination unless not allowed in the plan document)

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Everything else stands

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