Can you safely hedge USD inflation risk with foreign currency in an IRA?
Posted by John Reed on
Copyright 2013 John T. Reed
Many readers have IRAs with a lot of money in them. I urge them to get that money into foreign currencies in foreign countries.
I did that. I simply withdrew the money and sent it abroad to the foreign banks. As one who is over age 59.5, I did not have to pay the 10% penalty for early withdrawal, but I did have to pay tax on the withdrawals at ordinary income rates.
But as I repeatedly point out, you have to pay tax in the IRA money whenever you withdraw it. So the fact that you have to pay that tax is a non-issue. If you still think it is relevant, you are devoid of logic. You can pay the IRS now or you can pay them later, but you cannot avoid paying them. And if you choose later, and we get hyperinflation in the interim, you won’t just lose the tax payable, you will lose the entire amount that is invented in USD-denominated assets. (USD is the currency code for U.S. dollars.) Why am I the only one who can see that’s worse than paying the tax?
The only issue is are you adequately protected from USD hyperinflation. Protection means hard assets and/or stable foreign currency. You need stable foreign currency because it is the only hyperinflation-protected liquid asset and you must have some liquid assets to buy food, fuel, other necessities, and to pay your routine bills.
Can have a foreign currency IRA at Everbank
Can you have that foreign currency in an IRA. Yes. At Everbank.
Will that constitute a good hedge against USD hyperinflation?
Instantly turns back into a pumpkin at start of hyperinflation
Absolutely not. Everbank’s own fine print warns that if the U.S. government enacts capital controls which prohibit your owning foreign currency that they, Everbank, will convert your foreign funds to USD, probably at a lousy conversion rate because they are essentially selling your foreign currency to the U.S. government and the U.S. government is likely to steal part of the value of your foreign currency in the process.
Executive Order 6102
They did this before with Executive Order 6102 in 1933. All U.S. residents were ordered to turn in all bullion gold to the nearest Federal Reserve Bank by May 1, 1933. The Federal Reserve paid them $20.67 an ounce for it. That was the fixed gold exchange rate since 1843. In 1933, at the time the order was issued, the market value of the gold was more than $20.67. So the U.S. government stole the difference from the residents of America.
Foreign-currency IRAs in Everbank are totally exposed to capital controls
Essentially, when it comes to using foreign currency to hedge against USD hyperinflation, the Everbank fine print is the equivalent of a fire insurance policy that contains a clause that says you cannot file a claim in the event of a fire. The key is you must still own the foreign currency AFTER the U.S. government outlaws it. When hyperinflation starts, the U.S. government will enact capital controls. They are probably already drawn up and can be issued on a moment’s notice.
Gotta get the money out of the country into a bank that is out of the country and not U.S. owned or regulated
If your foreign currency is in a bank outside the U.S.—as opposed to Everbank which is inside the U.S.—U.S. capital controls do not apply. The U.S. government has no power to order a foreign bank to sell it your foreign money for less than market value or even at market value.
So Everbank is not worth a damn as a place to hold foreign currency as a hedge against UD hyperinflation. Why am I picking on Everbank? They are the only U.S. bank that lets individuals have foreign-currency accounts.
So can you hold foreign currency in an IRA? Yes. At Everbank.
It’s also FDIC-insured. But FDIC insurance is also not worth a damn with regard to hyperinflation because it does not restore purchasing power, only nominal dollars lost.
My bank accounts in Australia and Canada are federally insured by those governments (CDIC in the case of Canada). My New Zealand bank accounts do not have deposit insurance. New Zealand doesn’t believe in it. So I have three separate banks there. And New Zealand is the number one rated country in the world for integrity according to Transparency International.
What about a self-directed IRA? Could that hold foreign currencies beyond the jurisdiction of U.S. capital controls?
My tentative conclusion is no.
As stated above, there is no problem with having foreign currency in your IRA. The problem is you have to have a U.S.-government-approved trustee or custodian. That means he or she has to comply with U.S. capital controls when they are enacted.
You are required to fund your IRA with USD. Fine. Not a problem.
But I get a sense that withdrawals also must be in the form of USD. Big problem. It defeats the whole purpose of owning the foreign currency.
Your trust or custodial account must be set up “in the U.S.” 26 CFR §1.408-2(b) It “must be maintained at all times as a domestic trust in the United States.” It “must have an established place of business in the United States where it is accessible during every business day.” That means it can be raided by the FBI, Treasury, and such.
Uh oh. Don’t like that. If it’s in the U.S. it must comply with U.S. capital controls.
The trustee or custodian must be approved by the IRS. Don’t like that either. They could terminate the license of the trustee or custodian for not complying with U.S. capital controls.
If any readers know of facts or logic that indicates you can roll an IRA over into foreign bank accounts abroad that future U.S. capital controls cannot get at, please let me know.
Hard assets only in your IRA
So what good is an IRA for hyperinflation purposes for those of you who cannot bring yourself to withdraw the money? You’d better put virtually all the money in your IRA into hard assets (e.g., real estate, commodity funds) or quasi-hard assets like stocks of corporations that own at least some hard assets. I will write about doing that later.
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