Everything changed overnight… what to do now?

by Simon Black · 12 comments

June 23, 2010
Oxford, England

Yesterday in the UK, something happened that has significant implications for us all.

Old western economies are clearly losing their dominance. Particularly in Europe, the costs of broken pension plans and entitlement programs are bankrupting entire economies.

Yet, national governments continue to perversely borrow and consume; politicians have been acting like degenerate gamblers, borrowing money from anyone they could, blowing it all on terrible bets, borrowing more money to make even worse bets, and actually expecting different results.

Something needs to change… and it appears that Britain is the first major western government to face the music. As such, British Chancellor of the Exchequer George Osborne unveiled yesterday what has been touted as ‘emergency’ budget austerity.

Osborne’s budget cuts deep. It hits the elderly, it hits low income workers, it hits single mothers, it hits business owners and investors… it even hits the Queen, who will see her multimillion pound salary frozen for several years.

To give credit where credit is due, Osborne should be commended for looking his nation in the face, speaking about a very grim reality, and being candid about the tough sacrifices that everyone will have to make.

But here’s the scary part, and what we need to learn from:

While there was significant talk in Osborne’s speech about spending cuts, most line items have yet to be fully determined. What they are absolutely clear about, though, are the tax changes.

Britain’s VAT, for example, will increase from 17.5% to 20%.  Many personal income tax rates will rise as well, particularly for high income earners.  These changes will be phased in gradually… except for one.

Osborne announced that Britain’s capital gains tax will increase from 18% to 28% for higher income earners. Yet unlike the other changes which are phased in over time, capital gains tax change occurs IMMEDIATELY.

There is a serious lesson here: governments have the power and willingness to make major changes overnight. With the stroke of a pen, they can impose capital controls, higher taxes, gold forfeiture, confiscation of retirement savings, or anything else they can dream up.

Britain’s emergency budget underscores this point even more, and reminds those of us who aren’t in the UK that we need to prepare NOW.  Why? Because other countries won’t be far behind, including the United States.

At a certain point, President Obama will be forced by circumstance to look the American people in the eye and ask them to sacrifice… and pay higher taxes effective immediately.

Also, it’s likely that the US government will get its hands on private retirement savings some day soon… there’s about $5 trillion out there, and at some point that they’ll mandate a portion of all managed retirement accounts to be held in the ‘safety’ of US Treasuries.

I can’t stress this enough– proper financial planning should be an integral part of your multiple flag strategy.

To protect yourself from overnight tax hikes, this means using existing, legitimate tax shelters.  US tax code, for example, provides a means for people to set aside tax-deferred savings for retirement through an IRA or 401(k).

Most of these entities, though, are unfortunately engineered to generate profits for the financial institution who manages the account, rather than the individual who is busting his butt every day to save for retirement.

The best solution that protects your savings from rising tax rates and government confiscation is to hold your investments in an Open Opportunity IRA structure.

Similar to a regular IRA, an Open Opportunity IRA allows you to generate tax-deferred (or tax-free) returns on your savings. Unlike a regular IRA, this structure gives you complete control and flexibility to do what you want with your retirement savings– like planting multiple flags overseas.

With an Open Opportunity IRA structure, you can buy foreign property, store gold overseas, establish an offshore bank account… as well as invest in all the other instruments that you might already be investing in right now with your retirements savings.

The big difference? It’s nearly impossible for the government to get their hands on it.  And if you start investing through this tax deferred structure, you won’t wake up one morning to higher tax rates that will pummel your investment returns… which is exactly what happened in the UK this morning.

This is one of the biggest no-brainers for US taxpayers… even if you’re just starting out, establishing one of these structures provides a long-term solution to generate tax-deferred or tax-free savings as you make contributions over time.

Terry Coxon is a leading expert in this industry; he’s authored numerous books on tax and personal finance issues, and his latest e-book is one that you should absolutely own.

In Unleash Your IRA, Terry explains the real magic behind these structures– how to set one up, how to protect yourself and your assets, and all the amazing things you can do while still following the tax rules.

Click here to get this book now.

I strongly urge you to take action now… continuing to kick the can down the road is a very dangerous course of action given all the warning signs around us.

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  • Songstarter71

    can you please comment on the following article critical of open IRA’s?

    “A now well established and conventional estate-planning strategy is to put assets into an LLC having features that suppress the fair market value of ownership shares in the LLC. Such features often include restrictions on transferring shares, restrictions on distributions and a requirement for a supermajority, or even unanimity, to dissolve the LLC. Achieving a discount of 35 percent (the value of the shares vs. the value of the assets inside the LLC) is common, which reduces the related gift or estate tax by 35 percent.”

    Coxon concludes that you can apply that strategy to a Roth conversion, “since it is the fair market value of the assets being transferred to the Roth — the shares in the LLC — that gets taxed. The result can be a big cut in the tax cost of making the conversion.”

    Is it a scam?
    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.”

    http://www.bankrate.com/financing/retirement/the-open-opportunity-ira/

  • Npnotesin

    Here is the alternate perspective on Open Opportunity IRA

    http://www.bankrate.com/financing/retirement/th…

  • Craig

    I cannot see how this “Open IRA” scheme in any way mitigates the risk of confiscation.

  • Giselle

    Hi Simon,
    First, thanks for the inside information! I was looking at an article from BankRate (http://www.bankrate.com/financing/retirement/th…) The author criticizes this type of IRA as very agressive. He also mentiones that “the combination of minority non-controlling interest, with restrictions on salability and transferability, reduces its value.” What does that mean? If you are the owner of the IRA and you are the IRA itself how can there be a third party share?

  • http://twitter.com/kungfucraig Craig W. Wright

    I decided to take the jump and purchase the information about the OO IRA. It's very interesting. The rules prohibit one of the things I wanted to do – buy some property from myself – but I think I will be setting one of these up in the near future.

  • Giselle

    Hi Simon,
    First, thanks for the inside information! I was looking at an article from BankRate. The author criticizes this type of IRA as very agressive. He also mentiones that “the combination of minority non-controlling interest, with restrictions on salability and transferability, reduces its value.” What does that mean? If you are the owner of the IRA and you are the IRA itself how can there be a third party share?

    • Passport IRA

      Hi Giselle,The ‘aggressiveness’ mentioned in the bankrate article was only in regards to the Roth conversion. An Open Opportunity IRA provides all of the benefits you have mentioned several times; flexibility to invest in alternative assets, diversification to plant multiple flags, and bank account control rather than being in the 96% whose custodian would rollover immediately if the government passed something.In regards to the ‘aggressive’ Roth conversion (which tax attorneys may consider a compliment). There is a long history of taxpayer vs. IRS litigation on valuing interests in private companies. That’s what makes it extremely important to work with expert tax attorneys to make sure the set-up and valuation are done properly. This method has been used in estate planning for years, and there’s no reason to not do tax planning for the rest of your wealth and not your IRA.

    • Passport IRA

      Hi Giselle,
      The 'aggressiveness' mentioned in the bankrate article was only in regards to the Roth conversion. An Open Opportunity IRA provides all of the benefits Simon has mentioned several times; flexibility to invest in alternative assets, diversification to plant multiple flags, and bank account control rather than being in the 96% whose custodian would rollover immediately if the government passed something.

      In regards to the 'aggressive' Roth conversion, most tax attorneys would consider this statement a compliment. There is a long history of taxpayer vs. IRS litigation on valuing interests in private companies. That's what makes it extremely important to work with expert tax attorneys to make sure the set-up and valuation are done properly. This method has been used in estate planning for years, and there's no reason to not do tax planning for the rest of your wealth and not your IRA.

  • Songstarter71

    can you please comment on the following article critical of open IRA's?

    “A now well established and conventional estate-planning strategy is to put assets into an LLC having features that suppress the fair market value of ownership shares in the LLC. Such features often include restrictions on transferring shares, restrictions on distributions and a requirement for a supermajority, or even unanimity, to dissolve the LLC. Achieving a discount of 35 percent (the value of the shares vs. the value of the assets inside the LLC) is common, which reduces the related gift or estate tax by 35 percent.”

    Coxon concludes that you can apply that strategy to a Roth conversion, “since it is the fair market value of the assets being transferred to the Roth — the shares in the LLC — that gets taxed. The result can be a big cut in the tax cost of making the conversion.”

    Is it a scam?
    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.”

  • Scott

    Thanks Simon. I'm heading down this path as well with my IRA. If something does get passed, at least my investments will be overseas with people who aren't required to give in to our gov't. I'm with Fidelity right now and they told me if Congress passed something, they'd comply immediately without my approval.

    At least this way I'll decide if I comply.

  • Astolyar55

    I purchase an Unlish Your IRA book with an understanding (per an advertisement) that I can get my money back in 90 day, if I'm not happy, but in no place I was able to find direction how to ask for the refund. It's look like a scam to me. If anyone know the wayto contact the publisher abd ask for the refund? Thanks. Alex

    • simonblack

      Type your reply…

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