Capital Controls, $5,000/oz Gold and Self-Directed Retirement Accounts (March 1, 2013)
A wide-ranging conversation on capital controls, gold and self-directed retirement accounts.
Recent news stories about Federal plans to "help" manage private retirement accounts renewed my interest in the topic of capital controls. One example of capital control is to limit the amount of money that can be transferred out of the country. Another is limiting the amount of cash that can be withdrawn from accounts.
The article linked above suggested a third example, in which the government mandates private capital must be invested in government bonds. The way this might work is this: an agency of the Federal government might announce that to "protect" households' $19 trillion in retirement funds from the vagaries of the market, 50% of all retirement accounts must be invested in "safe" Treasury bonds.
Though presented as "helping" households, the real purpose of the power grab would be to enable the Federal government to borrow the nation's retirement accounts at near-zero rates of return.
As things fall apart, Central States pursue all sorts of politically expedient measures to protect the State's power and the wealth of the political and financial Elites. Precedent won't matter; survival of the State and its Elites will trump every other consideration.
To explore alternatives to conventional retirement accounts (IRAs and employer-funded 401Ks), I asked Michael Reps to join me in an email conversation on capital controls, gold and self-directed retirement accounts. Michael and I have a long history of correspondence, and his great respect for the oftwominds.com audience led him to advertise his Expat Your Wallet service here.
I personally have what is known as a solo or self-directed 401k trust, an individually managed retirement account designed for sole proprietors. I am no tax expert, but self-directed 401ks have larger tax-deferred contribution limits than IRAs and at least some of them allow the owners to invest in real estate and other tangible assets, in stark contrast to IRAs and employer-managed 401Ks.
Very few people seem to have heard of self-directed retirement options, and so this conversation is an attempt to explore some of the issues related to capital controls and self-directed retirement accounts.
Please note that these accounts may not be for
everyone, and not everyone may qualify to establish such an account. The following is
not advice or a recommendation, it is an informal, broad-ranging discussion on a variety
of topics. Please read the HUGE GIANT BIG FAT DISCLAIMER before reading on.
Many if not most gold analysts will discuss at length and great detail the catalysts or conditions that could lead to gold's further bull run. These reasons are too detailed and varied to go over here. The purpose of this Q&A is not to refute their claims but rather to acknowledge them and to ask one question: What would America look like with gold at $5000 an ounce?
Does it mean that the gold bugs win and the rest of the population loses? Can you walk into an appliance store an buy a refrigerator, dishwasher and washer/dryer with a few ounces of the ancient barbaric relic? Does it represent the onset of hyperinflation where buying power is diminishing? Or does it mean that speculators have caught wind of the next best momentum investment? In other words, is the rise in the price of gold "Value Driven", "Event Driven" or "Price Action Driven"?
Instead of attempting to forecast how gold "should" rise in value and price, would it not be better to consider the world we live in based on "Why" gold has risen?
Consider what these three economic events could do to your retirement: rising interest rates, a falling US Dollar or major bank failures. All three can send gold to parabolic levels and wreak havoc on your nest egg. They represent either a loss of spending power, a loss of borrowing power, or an outright loss of capital.
Current thinking dictates that one is to grow, grow, grow savings until they retire and then spend, spend, spend, down a life's worth of savings, overlooking the fact that at the time of retirement the account statement may read 6 figures in nominal value but have only 5 figures of buying power. Many will consider gold and silver as a hedge against such an event and I wouldn't argue. The ability to freeze in place stores of value that cannot be degraded by reckless monetary policy may be the only hope for Boomers.
All this raises an interesting question: what would America look like at $5000 an ounce gold?
A January 2011 Moody's report noted that the ratio of national debt to national tax revenue in the United States is the worst of all the AAA-rated countries in the world. The U.S. fiscal condition has deteriorated to the point where its debt to revenue ratio is nearly three times higher than the AAA median, and more than twice that of Germany, the U.K., the Netherlands, Switzerland and Canada.
Even the German Bundesbank is getting wobbly, as they request the return of their 300 tons of gold held at the NY Federal Reserve Bank, which came just three months after the Federal Reserve refused to submit to an audit of its holdings on Germany's behalf. The end result is that faith is running thin regarding the safety of US domiciled assets. Now we hear of the Netherlands, and others making overtures about the safety of their assets. We should take a clue from this.
A legitimate free market should always price things based on real supply and real demand and my contention is that there will always be a market somewhere that will recognize gold's real value. This goes for many other stores of value as well, but precious metals do have a very universal appeal. This may be one reason why there are services out there that help people store precious metals offshore.
It is when I started going down this path that I discovered something quite interesting that I think your readers may benefit from, and that is to not only self-direct their retirement accounts but to self-direct them overseas where they have a new set of opportunities not readily available at home.
For the increased number of boomers who are leaving the work force and considering an affordable retirement, living in another country may be their best option, at least for now, while the US Dollar is strong on a relative basis. Countless Americans don't just flock to the warm sands of Florida to escape cold winters and New York State's income tax, they retreat to Central and South America, the South Pacific, and other regions around the world where the cost of living may be more in line with their actual budget.
So ask yourself, "In US Dollar terms, do you believe you will be able to buy more or buy less in another country 10 years from now with your US Dollars?" For some answers to this it may be helpful to understand how the US Government views your individual retirement account or 401k in the first place.
In 1984, the Treasury Department proposed to eliminate Section 401(k) from the Internal Revenue Code. Although this proposal was never implemented, the Tax Reform Act of 1986 (TRA ’86) substantially tightened the rules governing 401(k) plans. Congress changed the rules because it thought that these plans did not provide adequately for rank-and-file employees and that these plans should be secondary, not primary, retirement plans. Source **
Retirement plans were intended to be a supplement, not a replacement for the role of the Social Security Administration. As a supplement, I believe if it came down to a choice between saving Social Security at the expense of individual retirement plans I'll side with the government winning this one. It is not a stretch to imagine a significant percentage of the $19 trillion in retirement savings pledged as a "fix it" for a "Social Security Crisis."
This is where self-directing your retirement plan into tangible assets such as real estate, agriculture, heavy equipment, or even a solid business, starts to shine. And don't think for a moment that these assets have to reside in the US. They don't.
Enter Treasury Regulation Sub-chapter A Sec.1.408-2 (b) This is simply the regulation that states that an individual retirement account must be a trust created or organized in the United States and that such trust must be maintained at all times as a domestic trust of the United States. It is not difficult to see that many will view this rule as also confining the assets invested in the retirement plan to inside the United States or US based financial institutions.
However, this is not so. Millions of Americans hold ownership stakes in foreign companies from BP to Sony inside their IRAs and while they may be traded as depository receipts or within international mutual funds, they are still foreign in origin.
Lost in the noise and confusion of the financial media is the important distinction between the "CUSTODIAN" of the retirement assets and the "INVESTOR" of those assets. These are two distinct and separate entities involved in your retirement plan, one dedicated to IRS Compliance while the other dedicated to investment opportunities. While you must adhere to the custodianship rules outlined in Sec. 1.408-2(b) in an IRA you can elect to be the "INVESTOR" of those assets, opening up a whole universe of choices outside of the US.
But don't expect the larger financial intermediaries to make you aware of this regulation. The more you believe that your investment choices are a privilege bestowed on you by the designated mutual fund company, the more you will avoid looking outside the NYSE or even US borders.
Think of it as starting your own Fidelity Investments but you are the only client and you are the only employee. This is the simplest way to explain it. Your company has rights and the ability to invest but there are restrictions to what your business can own.
The following is a brief list of what you can invest in:
And as I mentioned, if you incorporate outside of the US you then will have to pay corporate taxes in that country of incorporation. This may seem counter-productive, but paying 25% in taxes on 4% bond yields beats a tax free 1% CD yield any day, and many countries have low corporate or even no capital gains taxes.
Another thing you must be mindful of are "Prohibited Transactions." You need to be aware that any addition to the account in the form of labor must be viewed as a contribution. That is, everything, and to some degree, everyone who contributes to the accounts' existence and operation must be compensated by the plan and only the plan otherwise that contribution can be viewed as a deposit of funds for lack of a better description. Gaining compensation outside of the plan for the benefit of the plan can run you into trouble with the IRS.
For example, if you buy a rental and use a property manager, the property manager must be compensated by the plan and not by you. If the rental needs a roof, that roof must come from the plan and not outside of the plan as it would be deemed a contribution. This could also apply if you decide to put a coat of paint on the building or cut its lawn. Again, it is best to get acquainted with this program and the net is filled with people offering this service.
Another thing they could do is speak with a financial/tax professional that recognizes self-directed accounts.
I'm currently liaising with Immigration NZ and a couple who plan to retire here and the process is very straightforward since the assets are treated as no different than a taxable account. As for other countries, it pays to get an answer direct from an official source to be certain.
In the end, if you have a long range plan for retirement that involves exposing yourself to as many options as possible, it may be best to start implementing that plan sooner rather than later.
Thank you, Michael, for a most interesting discussion.
For those interested in exploring options mentioned here, please consult a qualified
financial/tax professional to learn more about your retirement account and
retirement planning options.
Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:
1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
5. Technological, financial and demographic changes in our economy
Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of
the same coin: once we accept responsibility, we become powerful.
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