Hi. It’s now my second post to the forum!
I’d like to invest with a mix of cash and funds from my 401k. I’ve seen scattered mentions of funds that make this easier without doing a self directed IRA and LLCs and all that. Mercan comes up a lot, though I’m not comfortable with the hospitality sector.
I’m kind of hoping to benefit from someone else’s research on the options available. Has anyone gone deep into researching or posting on this with funds that pass the non-real estate requirements?
I learned a lot in the past few days so I thought I’d share. Usual disclaimers. I may be an idiot. Confirm everything with a professional.
There is a type of IRA you can open that is called self-directed (SDIRA). You can transfer or roll over funds from your existing IRA/401k. The SDIRA allows you to invest in securities or real estate that a typical bank IRA won’t do. It’s your money and you are allowed to invest it how you choose (within some bounds).
For a GV investment from an SDIRA, the usual process is to create a US LLC that administers the money. Then you need the Portuguese equivalent of an LLC set up there. You transfer money between the two and the bank provides a letter certifying where the funds came from. From there you invest from the Portuguese account.
The exception to the process above is Optimize and, maybe, Mercan. You can invest in them directly from your SDIRA, without needing the bank account or pass through businesses. If anyone knows of other funds please tell us.
There is one big catch and that’s Portuguese taxes. When you sell the GV account, the capital gains will be subject to tax in Portugal. It will be likely be 21% or 28% depending on your situation.
If you’ve done it right in the US then the capital gains won’t be taxed. But, as with all retirement funds, it will be as taxed as income when you withdrawal it. This means you’ve paid tax twice on the capital gains from the GV fund.
If you invest 500k with a 5% yearly return over 6 years that will be 170k of capital gains taxed by Portugal at 21% or 28%. That’s about 37k or 49k of extra taxes. It negates the advantage of a tax free account for those 6 years. Depending on your income situation, it might not even be far off from just eating the 10% early withdrawal penalty in the US and having a MUCH simpler setup to get your GV.
One more note that impacts people my age. Normally you pay the US early withdrawal penalty if you are under 59.5 years old. But if you leave a job at 55+ and you have a 401k administered by that employer, you can withdrawal from that 401k without penalty. It’s still income of course.
Anyway, I’m not going any further with using retirement funds. I’d prefer to tie up retirement money instead of my spending money, but I can make it work. I’m also uncomfortable with the complication of the SDIRA path, on top of the already complicated standard GV process.
I hope I got all of this right. It’s a lot for my small human brain.
I’ve been investigating using a a solo 401k in this fashion and have come to the conclusion that it adds too much complexity and cost. The requirements are the same with as with an SDIRA - the 401k trust opens an LLC to manage investments which opens an LDA in Portugal to invest in whatever.
The problems are the extra paperwork and the added cost at every step. An LLC isn’t too much additional cost, depending on where you are. An LDA in Portugal has its own ongoing costs and requires retaining a tax representative in Portugal. All told this runs about $3500-4000/yr. Then you’ve got to open a business bank account with high fees. Then the tax issues described above.
For anyone stumbling upon this thread, if interested in pursuing the SDIRA path without the additional steps of an LLC + Lda, check out the posts from @Tatley about her journey doing so with Optimize:
@dyltavio Thank you for sharing your learnings, too! The 21% or 28% tax in Portugal you refer to (presumably CIT and personal capital gains tax, respectively), do they also apply when investing directly from your SDIRA into a fund such as Optimize?
I understand the ~21% CIT if you have a Portuguese Lda, but what’s the justification for the 28% tax? Typically, movable capital gains (like fund investments) are taxed where you are personally considered tax resident, not where the fund is based.
Granted, I haven’t looked into the SDIRA path in any detail yet, so totally possible that there’s some wrinkle there causing a different taxation outcome. So I’d love to learn more about what you learned in that respect!
You are right to dig into the Portuguese tax rates. I don’t understand that so well. Please correct anywhere I’m mistaken. I’m a novice who is only in the research phase.
The big picture takeaway is that using an SDIRA or solo 401k will result in the capital gains being double taxed. Taxed by Portugal when you sell the asset. Taxed by where ever you live as income when withdrawn.
Business
If using an Lda it looks straightforward. It’s all taxed by Portugal at 21%.
The advantage is that you can diversify or invest in any way you want that is GV eligible.
Personal with 100% in Optimize
Investing in Optimize is the only way I know of to fund it directly from an SDIRA – no LLC/Lda, no intermediate bank. In that case it will be taxed at the personal rate by Portugal. The only special tax treatment will be on the US side, where it will remain untaxed until withdrawal.
An interesting twist with Optimize is that you can invest directly into them from pre and after tax sources. You could use some IRA and some after tax funds. Optimize is acting as the single custodial bank and my adviser has confirmed that they are able to write a single letter of proof.
The nominal rate in Portugal is 28% for capital gains. What I missed is that there are many caveats which I won’t even try to get in to. I’d love to know of a source that is accurate and up to date. What I’m finding is all over the place.
The difference between being a resident and non resident is also inconsistently reported. My understanding is that non residents are taxed on any income or capital gains from Portuguese sources, but won’t be double taxed by the US at the time of sale.
Edit: I’m hiding that part above on the specific rates. I’m getting new information and I don’t know what is true.
There is so much contradiction out there that I’m thoroughly confused. 
Diversify with Optimize + others
I have been advised not to spit my investment by directly investing Optimize along with other funds that are invested into from a Portuguese bank account. That means two custodial banks and two letters of proof. The laywer wasn’t confident that it would be accepted.
If you want to diversify then start by putting your money into a single Portuguese bank account.
There are costs on maintaining a company in Portugal as well. From my research, that cost is much more than keeping you average US LLC. I would suggest you also look into that.
You usually get out of paying Portuguese tax on capital gains for anything but immovable assets (e.g. real estate) as long as you can rely on a tax treaty. The US-Portugal treaty and most other treaties give the taxing rights for capital gains related to movable assets to the country of residence of the beneficial owner of the income.
What I’m not 100% certain about if whether you can no longer benefit from the US-Portugal treaty when investing through a SDIRA. I would be a bit surprised if you couldn’t, but I haven’t verified this.
@dyltavio: Dylan
"There is one big catch and that’s Portuguese taxes. When you sell the GV account, the capital gains will be subject to tax in Portugal. It will be likely be 21% or 28% depending on your situation.
If you’ve done it right in the US, then the capital gains won’t be taxed. But, as with all retirement funds, it will be as taxed as income when you withdrawal it. This means you’ve paid tax twice on the capital gains from the GV fund.
If you invest 500k with a 5% yearly return over 6 years that will be 170k of capital gains taxed by Portugal at 21% or 28%. That’s about 37k or 49k of extra taxes. It negates the advantage of a tax free account for those 6 years. Depending on your income situation, it might not even be far off from just eating the 10% early withdrawal penalty in the US and having a MUCH simpler setup to get your GV.
There is no US capital gains tax on retirement accounts, only on investments outside of a tax-deferred account.
One more note that impacts people my age. Normally you pay the US early withdrawal penalty if you are under 59.5 years old. But if you leave a job at 55+ and you have a 401k administered by that employer, you can withdrawal from that 401k without penalty. It’s still income of course"
I am also not an expert, but have do a lot of research and consulting with experts, particularly on the US side of how this works using your retirement money and keeping it tax sheltered as retirement money.
On the Portuguese side, I think no matter what fund you invest in, there will be taxes to Portugal. On this I have more research to do, but I am sure the somehow someway Portugal will get their cut!
The thing to consider when trying to avoid the LLC route:
This will be my only response because I don’t want to get into an argument.
There is one big catch and that’s Portuguese taxes. When you sell the GV account, the capital gains will be subject to tax in Portugal. It will be likely be 21% or 28% depending on your situation.
If you’ve done it right in the US, then the capital gains won’t be taxed. But, as with all retirement funds, it will be as taxed as income when you withdrawal it.
- Yes, but this is true no matter what, you will have US and Portugal taxes to juggle. Whether you write a check from your regular deposit bank account, or through a SDIRA. Governments are gonna get their cut at some point.
The expectation of a US investor is that investments from a retirement account will remain tax free, as you say below. Investing into a foreign account from an IRA is unusual, and being taxed by a foreign government wasn’t something I considered at first. I was passing along this information to help others. I was clear in my distinction between Portuguese and US taxes.
- NO, your investment using your SDIRA is tax sheltered retirement investment. It is not a withdrawal (Distribution), it is an investment. There is no penalty, and any capital gains is part of that investment. You will pay US tax when you withdraw/take a Distribution based on your income bracket at the time you do so. No penalty- unless you have not meet the age requirement. So, investing that 500K in say Optimize as the same as any other investment in your retirement account. You pay taxes solely based on your income bracket at the time of the distribution.
The capital gains will be subject to tax by Portugal. It is not the same as investing in a US security when considering your entire tax situation. It does negate the 6-7 years of compounded, tax-free growth in your US retirement fund.
On the Portuguese side, I think no matter what fund you invest in, there will be taxes to Portugal. On this I have more research to do, but I am sure the somehow someway Portugal will get their cut!
You repeat what I already wrote. I have no idea why you aggressively disputed me.