Using U.S. Retirement Accounts for Golden Visa Investments: Legal and Tax Risks
Some U.S. investors exploring the Portuguese Golden Visa program consider using assets held in Self-Directed IRAs or Solo 401(k) plans to fund their investment. However, this approach carries significant legal and tax risk under U.S. law and may result in substantial penalties.
What Constitutes a Prohibited Transaction?
U.S. tax law prohibits retirement accounts from being used in ways that provide current personal benefit to the account holder. Internal Revenue Code §4975 defines “prohibited transactions” broadly, including any direct or indirect use of retirement assets to benefit a disqualified person, which includes the account holder.
Obtaining a Portuguese residence permit through a Golden Visa investment may be viewed by the IRS as a personal benefit. If retirement funds are used to make the investment and the investor later applies for residency, the IRS may conclude that a prohibited transaction has occurred.
What Are the Penalties for a Prohibited Transaction?
The consequences of a prohibited transaction are severe: the entire retirement account may be disqualified; the full account value may be treated as taxable income in the year of the violation; if the investor is under age 59½, a 10% early withdrawal penalty may apply; and additional excise taxes of up to 115% of the amount involved may be assessed.
In many cases, the total penalties can exceed the original investment amount. For example, a $600,000 investment through a Self-Directed IRA may result in over $970,000 in excise taxes, income tax, and early withdrawal penalties. This figure does not include additional tax obligations under the passive foreign investment company (PFIC) rules.
Investor Responsibility and Due Diligence
Investors are solely responsible for ensuring compliance with U.S. tax rules. It is not sufficient to rely on the assurances of fund managers, custodians, or promotional materials. The legal structure or timing of transactions does not protect against liability if the economic reality suggests retirement funds were used to obtain personal residency benefits.
Investors considering Golden Visa investments should consult with qualified U.S. tax advisors before proceeding. Retirement account structures should not be used unless the investor has received clear, individualized legal guidance confirming that the transaction does not create prohibited transaction risk.
Important Note for Fund Managers
Portuguese funds that accept investments from U.S. retirement accounts without proper safeguards may face multiple forms of exposure, including investor litigation, SEC enforcement, and state-level securities actions. These risks arise not only from the structure of the investment, but also from any failure to adequately disclose tax and compliance implications to investors.
If your fund markets to or receives capital from U.S. retirement accounts, we encourage you to explore the detailed analysis in our white paper on Self-Directed IRAs and Golden Visa funds, which outlines litigation, enforcement, and risk mitigation considerations, available here: https://www.areiaglobalconsultants.com/sdira-in-gv.
A Final Note
While some Golden Visa investments may be appropriate when funded with non-retirement assets, they are generally unsuitable for U.S. retirement accounts. The intersection of U.S. retirement account rules and Portuguese residency programs creates a high risk of unintended prohibited transactions. Investors should obtain individualized legal and tax advice before proceeding.
This communication is for informational purposes only and does not constitute legal, tax, or investment advice. Areia Global is a U.S. based law firm providing U.S. federal tax advice and does not provide Portuguese legal or tax advice. Any references to Portuguese law are based on guidance received from local counsel. Individuals should consult with qualified advisors in each relevant jurisdiction before making any decisions regarding asset ownership or tax planning.