Questions: Swiss Annuities, Vanuatu, Retirement, German Citizenship

by Simon Black · 14 comments

July 23, 2010
Krakow, Poland

Krakow is always beautiful in the summertime. It has one of the most vibrant city-centers in Europe… and as the economy is fairly healthy here in Poland, there are always a lot of people out in the streets enjoying themselves.

I’ll tell you more about Krakow next week; for now, on to this week’s questions.

First, Heather asks, “Simon, the article your wrote about currencies racing to the bottom is dead on.  I am trying to protect my retirement savings against depreciating major currencies, and I’ve been looking at using a Swiss annuity in my IRA. Have you heard much about this approach?”

Sure; a Swiss annuity is a fixed-income instrument that provides a low, fixed rate of interest, plus profit-sharing dividends. It is not subject to Swiss withholding tax, income tax, or capital gains tax, and in your IRA it would not necessarily be subject to US income tax either.

While a Swiss annuity may accomplish your goal of currency diversification, though, there are disadvantages; the rate of return can be fairly low, and there are often stiff penalties if you want to exit the annuity and redeploy your capital elsewhere.

For most people, a Swiss annuity makes a lot of sense if they’re looking to receive guaranteed income, or if they need to protect significant assets within the Swiss system through a legitimate, accepted tax shelter.

If your primary goal is currency diversification, you may want to consider an Open Opportunity IRA structure. This allows you to maintain 100% control over your retirement funds; in this case, you could keep your retirement funds in cash, diversifying across any currency of your choosing.

One approach would be to open an account at Everbank on behalf of the LLC owned by your Open Opportunity IRA; Everbank can denominate deposits in 20-different currencies, including the Swiss franc, Australian dollar, Brazilian real, Chinese renminbi, and Indian rupee.

With this approach, you can achieve currency diversification while maintaining liquidity of your retirement funds. If, in the future, you decide to plant a flag with your retirement funds by buying foreign property, you will have the liquidity and purchasing power to do so.

I really think that taking control of your retirement funds and planting this flag is a financial no-brainer. If you haven’t yet seen Terry Coxon’s book on the subject, Unleash Your IRA, I’d encourage you to check it out to learn exactly how to do this.

Next, Tim asks, “Simon, I’m an Australian citizen currently looking at Vanuatu as both a place to live and for planting tax flags; is this a good place for me to consider? Thanks for the great letter.”

Australians and Kiwis should definitely consider Vanuatu. As a small island nation fairly close to Australia’s eastern coast, you’ll have close proximity to home without having to deal with 45%+ Aussie tax rates.  In Vanuatu, there are no taxes on corporate profits, wage income, capital gains, or dividend income.

Planting a tax residency flag there makes a lot of sense, assuming you don’t have Australian-sourced income. Just be careful how much time you spend in Australia going forward; more than six months out of the year will pull you back into their tax net regardless of where you earn your income.

Next, Craig asks, “Simon, can retired members of the US military who renounce their citizenship still receive their retirement pension, or is it forfeited?”

In the US military, retirement is just one kind of personnel status, just like being active duty or reserve. Though no longer on active duty, retirees can technically be called up to serve again should the Defense Department deem this necessary.

As such, retirement pay is the compensation given to retirees for still being carried on the military’s personnel roster. This pay is contingent upon their eligibility to be recalled to active duty, as unlikely as that may be.

Upon renouncing US citizenship, a retiree forfeits his/her eligibility to serve in the US military, therefore the individual would no longer be entitled to receive retirement pay.  Note, renunciation would not affect disability pay.

For more information, read DoD Financial Management Regulation Volume 7B, Chapter 6.

Lastly, in response to a recent note I wrote about German citizenship, Marie was kind enough to provide some of her own experience about how she obtained citizenship:

“Simon, I was granted German citizenship from ancestry (my grandfather). There are major restrictions– the gender of the last two generations must be the same.  In my case, it was a German male, his daughter (my mother), and then me (female). If I had a brother he would not be entitled. Plus I had to be single, born after 1975, and never served in another nation’s military.”

Strange indeed; ancestry programs can be excellent, cost-effective ways of obtaining a tier-1 second passport. Unfortunately, it can be very challenging because the rules are rarely clear or logical. The same thing goes for ancestry citizenship here in Poland, which I shall tell you about at a later date.

Have a great weekend

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  • http://pulse.yahoo.com/_HH4O4ZDTOEQSUKNUQS7E7UNZVE Michael

    Thanks for answering the question on military retirement. I've always wondered but was too afraid to ask.

  • Peter

    Simon: You've spoken of Open Opportunity IRAs many times. Can someone leaving their job with a 401K plan take advantage of the OOIRA, too?

    Best regards, Peter

  • William

    Simon,

    You always amaze me with your breadth of knowledge but the DoD regulation was over the top. You always mention the Opportunity IRA and the ability to control your investments, but you do not discuss the tremendous savings available using it for a Roth conversion. My wife and I are going to save over $50,000 now with this fantastic idea and everything in the IRAs going forward will always be tax free! Thanks for telling us about this gold mine of an idea. We are both CPAs and have never seen this before.

  • G Mitchell Sr

    I'm finding much useful information in the “Notes from the Field” e-letters, for which I'm grateful, but here's a question I've not seen addressed. I'm just home after six weeks away: three on business, two on holiday, and yet another week of work. I now find that, in that short period, I've put on about five pounds/2.7 kilos. How the bloody do you keep fit whilst travelling full time?

  • PaulFX

    Thank you for the remarks on Swiss Annuities. One item that you did not mention in your letter is that they are excellent tool for those of us who are not from North America, and perhaps the easiest way to access the Swiss banking system through the annuity insurance scheme.

  • Coniuzelac

    hi – can you elaborate on the llc – which state is to create it in and what should it contain for retirement purposes – we already own a panamian corporation for real estate and have a couple of bank accounts in three different countries…thanks

  • Kate

    Simon,

    I Googled “Unleash Your IRA” and found the comment pasted below on Terry’s strategy. I decided to purchase Terry’s ebook through your link, yet would love to know your thoughts on this. I snagged the comment below from a forum discussing Terri’s book:

    “I asked Certified Financial Planner Michael Kitces, director of research at Pinnacle Advisory Group in Columbia, Md., if this was a scam. He says no. But the strategy Coxon describes, while possible, is “very aggressive,” Kitces told me via e-mail.

    “The IRS has been fighting many of these types of valuation discounts VERY hard in the estate tax world, and would likely fight them here as well,” Kitces says. The upshot: The discount may be disqualified by the IRS, or you just may end up losing money defending your position.

    Kitces says the discounting strategy is iffy when the LLC is owned by 1) the IRA and 2) the IRA owner. In his words:

    “The discounting for the LLC occurs typically through multiple owners. So you create an LLC. Your IRA owns 49 percent of it. You personally own 51 percent of the LLC. Now your IRA owns a minority share. You can also put restrictions on the salability of the LLC and the transferability of the LLC. The combination of minority non-controlling interest, with restrictions on salability and transferability, reduces its value. … ‘Ideally,’ an unrelated third party would own the majority controlling share; of course, most people don’t like that in the real world, because then they REALLY CAN’T CONTROL how the LLC is invested. The reflection of those fears — when they’re really applicable — is WHY there are such minority discounts. The unfortunate reality is that many taxpayers try to have their cake and eat it too — get the discount for minority and lack of control, but not ‘really’ give up control — and that’s where the problems tend to arise.”

    Here’s what I get out of it: The open opportunity IRA sounds like an open invitation to get into trouble with the IRS.”

    • Patrick

      I read that article too, but I think they were focusing too much on the discounting rules. I did my open opportunity a couple months ago, and now I have all the flexibility in the world to invest in the things I want rather than being stuck in US stocks. The discount is a secondary priority for me, I just wanted to ship my retirement savings overseas ASAP!

      • Kate

        Thanks for clarifying, Patrick!

      • Raymond

        I concur with Patrick's comment; the important thing to bear in mind is the flexibility of the structure. Barring some simple IRS restrictions, you can set up an Open Opportunity IRA and invest your money in whatever you determine to be in your best interest. This is iron-clad and clearly outlined in the Internal Revenue Code.

        As a CPA, I have recommended this structure to my more financially savvy clients, and I agree with Simon's viewpoint that this is a 'no brainer'. As for the discount valuation approach, some parts of this may be aggressive. However, this should not affect the IRA structure itself. You can always set up the structure and elect to not discount the assets.

  • Alex

    Simon, my understanding was that there had been a crackdown on Vanuatu starting in about 2008, resulting in it being a much less attractive location for tax-related purposes. Are you aware of this or do you still think Vanuatu is a viable options for Aussies and Kiwis?

  • Jason

    Must a retired federal civil servant who renounces citizenship continue forfeit his pension? And how about Social Security? Must recipients forfeit their retirement benefit?

  • Karl

    Thanks so much for the reference to the DoD regulation. As a “grey area” retired reservist, I've been meaning to look into this for some time. Just a quick comment, though. While I'm not a lawyer or financial expert, it appears that Active Duty retirement and Reserve retirement are treated differently. As I read the regulation, reservists would be entitled to retain their pension starting at age 60, even if citizenship is renounced – provided they aren't in the military of a country at war with the US and (here's the kicker) provided the law isn't changed.

  • Like you, I'd rather not say.

    Simon,
    To begin I enjoy receiving your daily email. I don't always agree but I almost always find it interesting. I am, like yourself, an American and travel abroad very extensively each year. Judging from what it seems you travel in a year I think I do about half. Though I never travel for business, I am not a backpacker or the like. I feel very fortunate that my travels are always so that I may keep up with family and good friends.

    I have had a true melange of experiences with US Customs returning to the US. I was interested to know what your experiences have been with US CBP when returning or transiting. How do you handle their questions? Which questions do you get most often? Which questions do you answer, and which ones do you deflect. Are there some questions that you feel are inappropriate? How often do you feel singled out? How do you compare these experiences with experiences in other countries.

    And finally, just for fun, how many extra sets of pages are in you passport?

    Cheers

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