PFIC in Retirement Account--Do I have a problem?

[emilylynn]

Alas, I discovered only after investing in a PFIC earlier this year (the Central Fund of Canada) that PFICs involve special tax treatment and onorous tax reporting requirements. Fortunately, perhaps, I hold that fund in a nontaxable retirement account.

Here's my question: Considering that this fund is held in a nontaxable account, is there any reason to file a Form 8621, or is the tax issue completely moot? I ask this because it occurred to me that there might possibly be unusual tax wrinkles when the funds are ultimately withdrawn.

Thanks in advance for any insights on this!

~Emily Lynn

[bpp3]

I think in a nontaxable retirement account you should be ok without filing. I am not even sure how you would fill it out in the case where the income you are declaring is nontaxable.

'Course I'm just some random person on the internet. You could try asking at fairmark.com for a second opinion -- they have less-random people who actually know what they're talking about. Or even ask the IRS directly.

[RetireeRobert]

Quote:

Originally Posted by emilylynn Alas, I discovered only after investing in a PFIC earlier this year (the Central Fund of Canada) that PFICs involve special tax treatment and onorous tax reporting requirements. Fortunately, perhaps, I hold that fund in a nontaxable retirement account. Here's my question: Considering that this fund is held in a nontaxable account, is there any reason to file a Form 8621, or is the tax issue completely moot? I ask this because it occurred to me that there might possibly be unusual tax wrinkles when the funds are ultimately withdrawn. Thanks in advance for any insights on this! ~Emily Lynn

Are you Canadian? In the US, I believe investments that go inside tax-deferred accounts (perhaps like master limited partnerships) do get "relieved" from tax-reporting requirements that would otherwise apply to such investments.

I don't know why the same would not also be true in Canada.

But it might be wise to ask the tax authorities directly. As well you might direct the question to the PFIC.

[eridanus]

Quote:

Originally Posted by RetireeRobert Are you Canadian? In the US, I believe investments that go inside tax-deferred accounts (perhaps like master limited partnerships) do get "relieved" from tax-reporting requirements that would otherwise apply to such investments.

Only if the UBTI is less than $1000. If it's >$1000, it'll be messy.

That's combined, too, for all MLPs in the tax-deferred account.

[emilylynn]

Quote:

Originally Posted by eridanus Only if the UBTI is less than $1000. If it's >$1000, it'll be messy. That's combined, too, for all MLPs in the tax-deferred account.

Thanks, all, for your kind responses. Eridanus, could I trouble you to explain? I'm not very sophisticated when it comes to tax issues.

[bpp3]

I think Eridanus is talking about Master Limited Partnerships, not PFICs.

[emilylynn]

Quote:

Originally Posted by bpp3 I think Eridanus is talking about Master Limited Partnerships, not PFICs.

Thanks, bpp. By the way, I really appreciated your earlier posts on the subject of PFICs. I can personally vouch for the fact that your posts from earlier years provide by far the most comprehensible discussion of this obscure tax topic available on the internet today!

I tend to agree that the IRS form doesn't even make sense as applied to nontaxable accounts. However, I find it strange that in several hours of internet research, I have yet to find any discussion of the subject. You'd think that if it were that simple there would be a ton of advice out there cautioning potential buyers of CEF to use retirement accounts for their purchases.

The IRS wasn't any help. According to its representatives, the topic goes beyond its expertise. Go figure.

[bpp3]

Quote:

Originally Posted by emilylynn Thanks, bpp. By the way, I really appreciated your earlier posts on the subject of PFICs. I can personally vouch for the fact that your posts from earlier years provide by far the most comprehensible discussion of this obscure tax topic available on the internet today!

Glad to know that my learning about these things the hard way were of help to others.

Quote:

I tend to agree that the IRS form doesn't even make sense as applied to nontaxable accounts. However, I find it strange that in several hours of internet research, I have yet to find any discussion of the subject. You'd think that if it were that simple there would be a ton of advice out there cautioning potential buyers of CEF to use retirement accounts for their purchases.

I'm not sure many people realize that CEF is a PFIC.

Quote:

The IRS wasn't any help. According to its representatives, the topic goes beyond its expertise. Go figure.

When I first started investing, using a Japanese mutual fund, I actually called the IRS's Tokyo office (back when they had one) and asked them how the tax treatment would work, and they said, oh, just treat it the same as a US mutual fund. Later, when I found out about PFICs, I called them back and asked them if this applied, and they basically said, "Hmm, looks like you are right." This stuff is obscure, even to the IRS.

[RetireeRobert]

Quote:

Originally Posted by bpp3 I think Eridanus is talking about Master Limited Partnerships, not PFICs.

Just for enlightenment--PFIC is ?

[bpp3]

Quote:

Originally Posted by RetireeRobert Just for enlightenment--PFIC is ?

Passive Foreign Investment Company: non-US-registered mutual funds, many or most non-US REITs,
and a few other types of company.

[emilylynn]

bpp, doesn't it also have something to do with the type of asset that is held? As I understand it, it's the "passive" part that causes the trouble. Since shares in CEF (the Central Fund of Canada) constitute shares in physical gold and silver bullion--as opposed to shares in a company that produces something--it regrettably falls within the same suspect category as some of the creative overseas vehicles used by tax evaders and money launderers. Do I have that right?

[bpp3]

Quote:

Originally Posted by emilylynn bpp, doesn't it also have something to do with the type of asset that is held? As I understand it, it's the "passive" part that causes the trouble. Since shares in CEF (the Central Fund of Canada) constitute shares in physical gold and silver bullion--as opposed to shares in a company that produces something--it regrettably falls within the same suspect category as some of the creative overseas vehicles used by tax evaders and money launderers. Do I have that right?

Yes, you're right. As I understand it, the intent was to discourage the use of offshore wrapper corporations which could do things like defer taxes on distributions by reinvesting them internally without passing them through (like what US Savings Bonds do), which US mutual funds can't do. So Congress created the PFIC category for foreign companies which have a lot of passive income or assets. The laws were drawn so broadly, however, that even companies which do not defer distributions fall into the category. Foreign REITs, for example, which have to pass through as much current income as possible and so are the very opposite of tax shelters, are PFICs unless they actively manage their properties. (This depends on the country; I gather many Canadian REITs do their own property management, so they are not PFICs, but Japanese REITs are forbidden from doing so, and so are all PFICs.) Some ordinary widget-making companies can also fall into this category if they happen to have too much passive income compared to income from operations, like startups or spinoffs which haven't started earning much from sales yet.

[ert445]

Hello,

Does anyone have any experience with this stock in a taxable account? What will happen if you sell this stock after holding it for a year without previously filling an election. Does your broker give you the correct tax forms?

[nun]

I once had a small financial windfall in the UK and wanted to park the money somewhere safe for a while until I decided what to do with it long term. So I was just going to park it in a National Savings Guaranteed Equity Bond, but then I remembered about PFIC so I called the IRS and asked them if it was a PFIC. Silence on the phone, they didn't even know ehat a PFIC was.

Basically its up to the individual to do the right thing so in cases like this you have to get an accountant involved or just stick to safe investments. I ended up putting it in a saving account and when I move back to the UK I will only invest in US based mutual funds and EFTs to make my US taxes easy