QUESTION: On page 41 of your book "Legal Ways to Save Taxes", it
says that a retirement savings plan can be a foreign trust and that
the trust is exempt from the reporting rules for a foreign grantor
trust. Your citation for this statement is tax code sections 404A and
406. I want to set up a qualified retirement plan using a foreign
pension trust. How can that be done? Does it matter what type of
entity I form, and whether the entity is foreign or domestic?

REPLY: The title of section 404A is somewhat mis-leading and I
appreciate your bringing this to my attention. As a result of delving
into this in more detail, I will remove this statement from the next
edition of our book. Basically, this code section seems to be intended
to permit U.S. employers to deduct contributions to a qualified
retirement savings plan for nonresident alien employees. In addition,
section 404A(g) provides that no deduction is allowed by this section
for plan contributions attributable to services provided by a citizen
or resident of the U.S. who is a "highly compensated employee" as
defined in section 414(q).

Section 406 does provide for American employees of a foreign affiliate
of an American employer to participate in a tax qualified (deferred)
retirement plan as described in section 401(a). Section 401(a)
describes the requirements for qualification of a retirement savings
plan that is deductible by employers and tax deferred for the
employees. One of those requirements is that the employer
contributions must be made to a trust created or organized in the U.S.
Code section 406 basically provides that contributions to a plan by a
foreign affiliate of a U.S. employer will be considered to be made by
the U.S. employer but it does not expressly state whether such
contributions can be made to a foreign trust as it does in section
404A. Nor did I find any such statement in the related IRS
regulations. I have not attempted to search for any IRS rulings, or
any court decisions that might bear on this issue. Perhaps there are
some specialists who are members of this group that have been involved
in establishing a retirement plan for the employees of a subsidiary of
a U.S. employer.

But as far as I can determine without a lot of further inquiry, it
seems that Code sections 404A and 406 are not suitable for a small
entrepreneur and owner of a controlled foreign corporation. It is
possible to set up a domestic plan that permits the beneficiary to
direct the investments (such as an IRA or 401k) into foreign securities.

Ben Vernazza, CPA/PFS is one of my partners in the International Tax
Compliance Group, LLC (www.itcgpros.com) and he has assisted in
setting up an offshore structure to provide better asset protection
for large IRA/401k accounts.

Here are a few other sources I found on the Internet by searching for
[ offshore+IRA ]

http://offshoreira.com/index.asp
http://www.jyskebank.com/2.0_products/2.3.6_retirement.asp?sLangID=uk
http://www.latimes.com/business/investing/la-ira-story4,1,6287144.story

Vern

The comments in this memorandum are not intended to constitute an
opinion regarding any specific tax issues because additional tax
issues may exist that could affect the tax treatment of the tax issues
addressed in this memo. This memorandum does not consider or reach a
conclusion with respect to those additional issues and was not written
and cannot be used for the purpose of avoiding penalties under code
section 6662(d). For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm