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Another Look at IRA Assets

"The Dos and Don'ts of IRA Investing" (JofA Apr. 00, page 45), states that an IRA can't be used to transfer funds overseas and that IRA owners should restrict investments to the continental United States. Both statements are incorrect.

First, investments in Alaska and Hawaii are certainly allowed, so "the continental United States" is too restrictive in that context.

Second, and more important, there are no restrictions whatsoever in either the regulations or the Internal Revenue Code, with respect to the physical location of IRA assets. Specifically, foreign investments are not included in the IRA prohibited-transaction rules. The only requirement is that a qualified U.S.-based IRA custodian or trustee be used. The investments themselves can be made anywhere in the world.

Additionally, an overseas IRA investment, when properly structured, can provide significant asset protection in states where IRA assets are not exempt from creditors. Practitioners should check with counsel in their states to determine whether IRA assets are subject to creditor claims.

J. Ben Vernazza, CPA/PFS Aptos, California Jim Bennett, Esq. Dallas

Author's reply: The letter writers make a good point--Alaska and Hawaii are, of course, considered domestic for asset investment purposes.

As for the comment on foreign investments, I stand by my opinion (having noted in the article "there isn't extensive guidance from federal regulators") that "direct" overseas investments are risky. There was no indication that indirect foreign investments are a problem. Perhaps I could have clarified the distinction between "direct" and "indirect" foreign investments.

It's a dicey proposition to say that direct foreign investments are OK without referencing citations supporting that--for example, letter rulings, Department of Labor advisory opinions, court decisions or IRS regulations. Something more concrete, at least a letter ruling, is needed before recommending that a client make direct overseas investments. Simply noting there are no restrictions with respect to the physical location of IRA assets is not enough assurance--at least not for my clients.

There are conflicting opinions on the viability of transferring any assets offshore, similar to family limited partnerships in estate planning. The risk of a fraudulent conveyance must always be considered.

For readers who want to pursue this topic, here are some references: Title I of ERISA (it is inconclusive whether this section of ERISA covers IRAs; if so, restrictions apply to direct ownership of foreign assets); ERISA section 404(b); DOL regulations section 2550.404b-1; DOL advisory opinion letters 84-14A, 75-80 and 91-28A; and IRC sections 4975 and 1104.

Robert Preston, CPA Danbury, Connecticut

More About Mutual Funds and Taxes

"A Taxing Problem" (JofA, May00, page 51) discussed the need for investors and their accountants to consider the impact taxes have on their total returns earned in mutual funds. The article provided some practical advice for executing sound tax strategies (for example, to avoid purchasing a mutual fund just before it is due to make a capital gains distribution).

However, one item is incorrect: "Most fund managers tend to sell stocks with the lowest cost basis ... to boost returns." Although I'm not sure that most fund managers tend to sell stocks with the lowest cost basis, I am certain that the tax lots they sell have no impact on a fund's total return. Selecting different tax lots affects the character of the gain, not the amount. In this instance, "character" categorizes gains as either realized or unrealized. Therefore, the total return of a fund, as currently calculated on a pretax basis, is not affected by tax lot selection. The pretax total return of a fund will be the same regardless of the tax lot selection method (for example, FIFO or specific identification).

It should be noted that when aftertax returns are required, the tax lot selection will affect the fund's aftertax return.

Richard P. Snyder Milwaukee

Investor Not Concerned

I found the article "A Taxing Problem" (JofA, May00, page 51) quite interesting.

I have never been too concerned about capital distributions from my mutual funds because I realize in the long run my total tax bill is based on the difference between how much I paid into the fund and the amount I receive when I finally redeem all my shares.

In the intervening time, I may have paid part of my capital gains tax on the annual distributions from the fund, but nevertheless, my total tax over the time I held that fund is based on the accumulated total I receive, less the amount of my original investment.

John Wm. Galbraith, CPA St. Petersburg, Florida

On Pooling

"Everyone Out of the Pool," (JofA, May00, page 45) lists several reasons the FASB has for eliminating pooling-of-interests accounting: less information, value disregards, financial statement user comparison difficulties and earnings distortions.

Much larger distortions, value disregards and comparison problems occur on a purchase transaction when historical (old) values are combined with fair market (new) values. The financial statement user has far less reliable information than when a pooling combines the historical values of two entities.

Frank Thomas Murphy, CPA Glendale, California

JofA Gets "A" for Effort

I read with incredulity the letter, "Database Preparation: Easy Access" (JofA, Mar. 00, page 95), regarding publication of an article on database use. The letter writer suggested that the subject was way beneath the scope of JofA readers.

I would like to commend you for including such an article. I have read your publication since my college days 14 years ago, and have referred to your magazine from varying perspectives over the years. Just because the letter writer was at a higher level does not preclude someone else's needing the information in the article. Trying to meet the needs of all levels is one thing I like about the JofA.

Also, another letter in the same issue, "Social Security: A Young Person's Viewpoint" (page 95), mentioned that workers these days have an overwhelming expectation of receiving Social Security benefits. You bet I do! I have paid Social Security for over 15 years. That money might not be there when I retire. The situation might not exist if I had been given the opportunity to invest it instead of the government. I do agree with additional retirement savings--the Social Security situation has made it necessary.

Thanks for your magazine--it makes reading about accounting issues enjoyable!

Jennifer Gardner Palm Harbor, Florida

We've Come a Long Way

I have been in public accounting for almost 40 years, and nay father was a practicing public accountant so I grew up with accounting as part of household conversation.

The article, "No One Stands Still in Public Accounting" (JofA, June00, page 67) was of great interest to me. It presented a history of the accounting profession at the turn of the century as well as a look at how the profession really took off after World War II.

I'm providing my current class of students with copies of the article so they can see how far the profession has progressed and how wide a range of services CPA firms now offer clients as compared with midcentury and the early decades.

I've read the JofA since my college days in the 1950s, and I have to commend the editors on the quality of articles in each issue and how well they address topics from all areas of accounting, not just tax or large firm practitioners. There is some article of interest every month for all the profession.

Milt Cohen Accounting Instructor--Adult Education Los Angeles Unified School District Chatsworth, California

Letter to the Editor

The opinions and views expressed are those of the letter writers and do not necessarily reflect those of the AICPA.

The JofA encourages readers to write letters on important professional issues in addition to comments on published articles. Because space is limited, letters submitted for publication should be no longer than 500 words. Please include telephone and fax numbers.
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Publication:Journal of Accountancy
Date:Aug 1, 2000
Previous Article:Inside AICPA.
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