Author Topic: PFIC classification for US investors  (Read 14388 times)

muscleman

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Re: PFIC classification for US investors
« Reply #10 on: March 31, 2015, 11:26:43 AM »
I have a new thought and would like to get an opinion from smart folks like Ericopoly and other US super investors on the matter of PFIC taxes.

Let's say I start a foreign tax exempt closed end fund with my friend. NAV is $100 and fund share price is initially $100.

After year 1, fund share price still $100 but NAV $130. I choose mark to market election on the PFIC form. I pay no tax.
After year 2, fund share price still $100 but NAV $180. I choose mark to market election on the PFIC form. I pay no tax.
.........

After 40 years, fund share price still $100 but NAV $5 million. I choose mark to market election on the PFIC form. I pay no tax.
Then in year 41, my fund buys back my shares at $5 million. I pay the 20% long term cap gain tax on the difference between $100 and $5 million.

Am I missing something? This seems pretty tax efficient to me. Of course this is pure theoretical as the fund share price will likely go up over the 40 years instead of staying at $100, but suppose it does, it will be really nice?
I am muslceman. I have more muscle than brain!


leeway

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Re: PFIC classification for US investors
« Reply #11 on: March 31, 2015, 02:23:10 PM »

I understand it to be the case that "Rollover IRAs" are ERISA accounts (because they originated from an employer-sponsored plan), but a "Traditional IRA" or "ROTH IRA" are not ERISA.

http://finance.zacks.com/ira-accounts-erisa-qualified-6814.html


Many thanks Eric for pointing out this. I was reluctant to move past 401K money to rollover IRA partially for ERISA status.

muscleman

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Re: PFIC classification for US investors
« Reply #12 on: March 31, 2015, 05:04:17 PM »

I understand it to be the case that "Rollover IRAs" are ERISA accounts (because they originated from an employer-sponsored plan), but a "Traditional IRA" or "ROTH IRA" are not ERISA.

http://finance.zacks.com/ira-accounts-erisa-qualified-6814.html


Many thanks Eric for pointing out this. I was reluctant to move past 401K money to rollover IRA partially for ERISA status.

So if you have the rollover IRA and transfer the money further into a traditional IRA, does that get rid of this ERISA status? How about rollover IRA to roth?
I am muslceman. I have more muscle than brain!

leeway

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Re: PFIC classification for US investors
« Reply #13 on: April 01, 2015, 09:01:42 AM »
I think so (losing ERISA qualification in both cases). Here is another link on this:
http://www.ehow.com/about_7605326_ira-accounts-erisa-qualified.html

I actually have some Roth 401K money too. Since there is no Roth Rollover IRA, I can only roll it over to a standard Roth and thus lose ERISA qualification. 

Ham Hockers

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Re: PFIC classification for US investors
« Reply #14 on: April 01, 2015, 12:34:31 PM »
Let's say I start a foreign tax exempt closed end fund with my friend. NAV is $100 and fund share price is initially $100.

I believe that would make your entity a CFC (Controlled Foreign Corp), which is another can of worms.

Ham Hockers

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Re: PFIC classification for US investors
« Reply #15 on: April 01, 2015, 12:46:43 PM »
Let's say I start a foreign tax exempt closed end fund with my friend. NAV is $100 and fund share price is initially $100.

I believe that would make your entity a CFC (Controlled Foreign Corp), which is another can of worms.

Also the whole scheme just sounds too good to be true, so it probably is. I mean, you probably wouldn't qualify for mark-to-market treatment at all, since your holding isn't really a marketable security.

netnet

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Re: PFIC classification for US investors
« Reply #16 on: April 01, 2015, 02:39:34 PM »
I think so (losing ERISA qualification in both cases). Here is another link on this:
http://www.ehow.com/about_7605326_ira-accounts-erisa-qualified.html

I actually have some Roth 401K money too. Since there is no Roth Rollover IRA, I can only roll it over to a standard Roth and thus lose ERISA qualification.

Uh, not true, once you have changed employers or retired, you can rollover your 401K Roth funds into a Roth IRA.  (There may be some loophole that allows you to roll it over while still with your original employer, but I have not looked into that, so, as they say check with you tax professional first.

muscleman

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Re: PFIC classification for US investors
« Reply #17 on: April 01, 2015, 03:25:38 PM »
Let's say I start a foreign tax exempt closed end fund with my friend. NAV is $100 and fund share price is initially $100.

I believe that would make your entity a CFC (Controlled Foreign Corp), which is another can of worms.

Also the whole scheme just sounds too good to be true, so it probably is. I mean, you probably wouldn't qualify for mark-to-market treatment at all, since your holding isn't really a marketable security.

But if I make it listed in a exchange, with only two shareholders---my friend and I, and we trade back and forth for a few shares per month to generate trading volume, doesn't that make it qualify for Mark to Market? ;)
I am muslceman. I have more muscle than brain!

leeway

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Re: PFIC classification for US investors
« Reply #18 on: April 02, 2015, 09:02:15 AM »
I think so (losing ERISA qualification in both cases). Here is another link on this:
http://www.ehow.com/about_7605326_ira-accounts-erisa-qualified.html

I actually have some Roth 401K money too. Since there is no Roth Rollover IRA, I can only roll it over to a standard Roth and thus lose ERISA qualification.

Uh, not true, once you have changed employers or retired, you can rollover your 401K Roth funds into a Roth IRA.  (There may be some loophole that allows you to roll it over while still with your original employer, but I have not looked into that, so, as they say check with you tax professional first.

Netnet, not sure which part you meant "not true". Yes I can rollover the Roth portion of my old 401K (with a previous employer) to a Roth IRA account .  But since there is no so called "Rollover Roth IRA", the rolled-over money will be in a standard Roth IRA account and would not qualify for ERISA status. Thus by rolling the Roth portion of my old 401K account, I would lose some ERISA protection. 

You or anyone thinks otherwise?

leeway

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