IRAs and International Investing: A Key Mistake to Avoid
Contents
- Prohibited Transactions: The Basics
- Can prohibited transactions happen when you have your retirement managed with firms like Schwab, Vanguard, Fidelity, etc.?
- What Happens When You Blow Up a Traditional IRA
- Example: A $1,000,000 Traditional IRA and a Prohibited Transaction
- What Happens When You Blow Up a Roth IRA
- Example: A $1,000,000 Roth IRA and a Prohibited Transaction
- How Does It Apply to International Investments?
- So What Exactly Made the Example That Kicked Off Today’s Piece a Prohibited Transaction?
- The reader missed a big tax flag
- “But I thought I could provide services if I have a Checkbook IRA?”
- What Are the Safest Ways to Invest Internationally and Use the IRA?
- 1. Use professional directors or local administrators for foreign companies.
- 2. Use a Checkbook IRA structure carefully.
- 3. Use third-party property managers for foreign real estate.
- 4. Keep visa or residency investments personal, not IRA-based.
- 5. Don’t sign on to foreign bank accounts tied to IRA assets.
- 6. Use the IRA only when true passivity is possible.
- This is NOT a DIY
- So is it Worth Investing Your IRA Internationally?
I’m considering investing in a private company at 10%. The concern is that the company asked me to join its board of directors. They offered me extra equity as a one-time incentive to join the board. The board work doesn’t pay any compensation.
I’ve read the prohibited transaction list and am not clear on if the board role would disqualify me. Can you confirm?*
*Minor details changed for privacy and flow.
We receive such questions regularly because our firm has developed a reputation as an expert on how to use retirement accounts for international investments. Even industry insiders seek out our knowledge.
The short answer to the reader’s question is… yes, very likely.
But why that is, and how that might be relevant to you, opens up an important discussion.
And if you’re investing internationally – whether into an international company, offshore precious metals, an overseas investment account, or foreign real estate – it’s very important to understand…
- What a prohibited transaction is.
- What it means if you accidentally make one.
- How to avoid them in the first place.
Let’s dive in.
Prohibited Transactions: The Basics
An IRA is supposed to help you save for retirement. You invest your money and you get a tax benefit – deferral or tax-free gains – depending on whether it’s a traditional or Roth IRA.
It’s designed to be a passive tool – you invest the money, the money earns a return, and you get a benefit when you retire… We call this “future you.”
But here’s the thing… your retirement account is not supposed to benefit you in the present (i.e. “present you”). For that reason, the IRS has detailed rules around what you can and can’t do with these funds. Breaking any of these rules – which are intentionally broad – is considered a prohibited transaction.
For example, the IRS doesn’t allow the owner—or certain family members or their companies—to provide services to, manage, or benefit from anything the IRA owns. These people are considered “disqualified persons”.
At its core, if a disqualified person does business with an IRA, Uncle Sam will consider the IRA owner to have engaged in a prohibited transaction and, as we consider it, “blown up” their retirement account.
How that plays out depends on whether it’s a traditional or a Roth IRA.
Can prohibited transactions happen when you have your retirement managed with firms like Schwab, Vanguard, Fidelity, etc.?
Theoretically yes but in practice, no. That’s because the terms and conditions of a managed account with a large US broker is very clear: you are the client and you have no day-to-day control over the investments themselves or their performance.
Today’s discussion is primarily about self-directed IRAs, which offer a lot more flexibility than a regular managed account through one of the larger providers. However, this comes at the expense of the “guardrails” that come with such accounts.
What Happens When You Blow Up a Traditional IRA
If a prohibited transaction happens inside a traditional IRA, the IRS treats the entire IRA as if you took all the money out on January 1 of that year. It doesn’t matter which investment caused the problem—the whole account is affected.
That means the full value of the IRA becomes taxable income for that year. If you’re under 59½, there’s also a 10% early-withdrawal penalty. And if the IRA holds things that are hard to value—like foreign property or private companies—the IRS can pick a high valuation and tax you on that amount.
Example: A $1,000,000 Traditional IRA and a Prohibited Transaction
Imagine someone has a traditional IRA worth $1,000,000. They accidentally trigger a prohibited transaction during the year.
The IRS treats the entire $1,000,000 as if it was fully withdrawn on January 1.
At a 37% tax rate, that creates a $370,000 tax bill.
And if the person is under 59½, they also owe a 10% early-withdrawal penalty. That’s another $100,000.
Total cost: $470,000 in taxes and penalties—triggered by a single mistake.
That’s a big tax bill that can put a big dent in your retirement plans!
What Happens When You Blow Up a Roth IRA
A Roth IRA reacts differently, but the outcome is still bad. If a prohibited transaction occurs, the IRS again treats the entire account as distributed on January 1 of that year. The key difference is how the tax works.
You’ve already paid tax on your Roth contributions, so those amounts aren’t taxed again. But the growth in the account—the earnings—is taxable if the Roth loses its qualified status.
For many long-term Roth holders, the earnings are the majority of the value.
Example: A $1,000,000 Roth IRA and a Prohibited Transaction
Imagine someone has a Roth IRA worth $1,000,000. Of that amount, $200,000 came from contributions and $800,000 is earnings.
A prohibited transaction occurs during the year.
The IRS treats the entire Roth as distributed on January 1.
The $200,000 in contributions is tax-free, but the $800,000 in earnings is taxed at the owner’s current income-tax rate.
At a 37% rate, that creates a $296,000 tax bill.
If the owner is under 59½, the 10% early-withdrawal penalty applies to the earnings as well — another $80,000.
Total cost: $376,000 in taxes and penalties.
Clearly, a Roth doesn’t escape prohibited-transaction rules just because it’s “tax-free.” The growth is still exposed when the account is blown up.
How Does It Apply to International Investments?
International structures add more opportunities for a prohibited transaction, often without the owner realizing it. It’s not uncommon for investors to be expected to play an active role in a company or property, and that’s exactly what an IRA owner can’t do.
Common trouble points include:
Foreign companies that require a director, officer, or local representative. If the IRA owns the shares, the IRA owner can’t fill those roles. Doing so counts as providing services to an entity the IRA invests in.
Foreign real estate that needs hands-on involvement. Handling tenants, repairs, or negotiations—even informally—can be treated as a service. In many countries, property owners must sign documents personally. That’s a big problem if the owner is signing on behalf of an IRA-owned asset.
Foreign banks that insist on having the beneficial owner or controlling individual as an account signatory. If the account belongs to an IRA-owned company, and the owner steps in as signer, that can cross into prohibited-transaction territory.
To make matters worse, very few international banks understand these rules. They may refuse to open an account unless you personally sign off, which again, would blow up the IRA.
(In practice, we’ve found that only Swiss banks have internalized how to do this properly… and even then, we work with our partners to double check all the paperwork before our clients open an account.)
Residency or immigration benefits tied to investment. If a visa or residency permit is tied to property or business owned by the IRA, the IRS can treat that as a personal benefit linked to IRA assets. It’s the main reason we never, even recommend our clients try to use their retirement funds to apply for a Golden Visa, Residency by Investment, or Citizenship by Investment program.
So What Exactly Made the Example That Kicked Off Today’s Piece a Prohibited Transaction?
The situation was simple on the surface: the reader’s IRA planned to buy 10% of a private company, and the company asked the client to join its board. They also offered an extra ownership percentage as an incentive for taking that role.
But it is still likely to be considered a prohibited transaction for two reasons:
#1: The reader will receive a personal benefit (additional equity) in exchange for serving on the board.
#2: An IRA owner cannot directly provide services to an IRA asset.
The reader missed a big tax flag
The focus of the reader’s question was on prohibited transactions, but there’s a separate issue that often matters just as much: UBIT (unrelated business income tax). When an IRA invests in an active business that generates operating (i.e. non-investment) income, the IRA can be taxed at trust tax rates, which reach 37% at very low-income levels.
That’s a problem many investors miss. Even if everything is structured perfectly and there’s no prohibited transaction, an IRA can still face a steep tax bill every year simply because it owns part of an operating company.
That’s why, from a tax-efficiency standpoint, it’s often better to invest personally in an active business rather than through an IRA. In many cases, you’ll end up with a lower tax bill.
“But I thought I could provide services if I have a Checkbook IRA?”
If you’re familiar with the idea of a Checkbook IRA – a type of self-directed IRA where the IRA owns a company that owns the investments. The IRA custodian legally responsible for the account makes you the day-to-day manager of the LLC. Clients like it because it gives them more flexibility over the day-to-day in a compliant way.
However, there’s a key distinction here that we see people mess up all the time.
A checkbook IRA only allows you to handle administrative tasks for the IRA’s own LLC — things like signing checks, approving expenses, or executing certain documents. Those are internal functions that support the IRA itself, not the underlying investment.
What it doesn’t allow is providing services to an operating business the IRA owns. Once you step into a role like director, officer, manager, or decision-maker for that business, you’re no longer “managing the IRA.” You’re managing the business — and that’s exactly what the prohibited-transaction rules don’t permit.
What Are the Safest Ways to Invest Internationally and Use the IRA?
Using an IRA for international investments can work, but only if the IRA stays passive and you stay out of any role that looks like management, control, or personal benefit.
The safest approaches all follow the same rule: The IRA owns. Someone else runs.
Here’s what works in practice:
1. Use professional directors or local administrators for foreign companies.
If a foreign company is needed, many countries require directors, officers, or a local representative. If the IRA owns the shares (directly or through an IRA LLC), those roles should be filled by third parties—not you. Your role is “owner via IRA,” not “director” or “representative.”
2. Use a Checkbook IRA structure carefully.
With a Checkbook IRA, the IRA owns an LLC, and you may act as the manager of that LLC. That can work if your role is limited to internal administration—signing checks, executing certain documents for the LLC, and carrying out instructions consistent with IRA rules. Just don’t provide personal services to the asset itself.
For international use, the most-compliant version is:
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The custodian remains the legal owner on record of the IRA and, when needed, the legal representative for the IRA itself.
-
The IRA-owned LLC is the entity that holds the foreign investment.
-
Your role as LLC manager is limited to administrative decisions for the LLC, not running the foreign operating business or providing services to it.
Once you start acting like management of the foreign company (or property), you’re over the line.
3. Use third-party property managers for foreign real estate.
If the IRA buys foreign real estate (directly or through an LLC), you shouldn’t be dealing with tenants, contractors, or repairs. A local property manager handles all of that. You don’t negotiate rents, don’t hire contractors, and don’t “help out” informally.
4. Keep visa or residency investments personal, not IRA-based.
If a country grants residency or a visa because of an investment, that investment should come from your personal funds. If the benefit (residency) is tied to an asset owned by your IRA, the IRS can treat that as a personal benefit from IRA assets.
5. Don’t sign on to foreign bank accounts tied to IRA assets.
Foreign banks often push to have the individual as the account signer. If the account belongs to an IRA-owned company, that’s risky. The custodian should sign, not you.
6. Use the IRA only when true passivity is possible.
If you want control, a board seat, or an operational role, that deal doesn’t belong inside the IRA. It belongs in your personal structure. The IRA should only go into situations where it can remain clearly and provably passive.
If you keep that one principle in mind—the IRA owns, you don’t run—most of the worst prohibited-transaction risks can be avoided, even in international settings.
This is NOT a DIY
We’ve been at this for more than 40 years, and I have been with The Nestmann Group since 2013 myself. I’ve seen all sorts of way in how this can go wrong…
…from the client who bought millions of dollars in foreign real estate with no professional help and then struggled to find an accountant who didn’t charge an arm and a leg to take on a very complicated compliance situation.
…to the client who responded to a late-night plumbing problem at his IRA owned short-term rental, and blew up his IRA.
…to the client who structured their Checkbook IRA in a very convoluted way and became “untouchable” to foreign banks. (Even though, it was technically compliant.)
To make matters worse, many of the people selling self-directed IRA options are either poorly informed about the rules, or the practical applications of these things, or they just don’t care and leave you to assume liability for your mistakes.
So is it Worth Investing Your IRA Internationally?
Yes, it certainly can be – but only if you do it right.
That means following the rules and avoiding prohibited transactions.
If you’re considering an overseas investment inside your IRA, talk with us before you commit. A short review can prevent an expensive mistake, and in many cases, a small structural adjustment is all that’s needed to keep the investment compliant.
We help clients sort out what belongs inside an IRA, what belongs outside of it, and how to keep the IRS from treating a cross-border opportunity as a prohibited transaction.
We have 40+ years experience helping Americans move, live and invest internationally…
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