How a Malta Pension Plan Solves the Roth IRA Problem
For high-income taxpayers, the commonly used Roth Individual Retirement Account (IRA) can have some frustrating limitations, and doesn’t address the unique needs of these types of individuals. Eligibility limitations, types of contributions, investment restrictions and delayed distributions are all problems faced by high-income taxpayers when attempting to contribute to a Roth IRA. Fortunately, the Malta Pension Plan (MPP) can provide a desirable alternative that mitigates these issues and gives the taxpayer a comparable option with distinct benefits.
The first issue often faced is that high-income taxpayers frequently have too high of an income to be eligible to contribute to a Roth IRA. This means that filers with a modified adjusted gross income exceeding $139,000 (single filers) or $206,000 (joint filers) in 2020 will be excluded from these types of accounts. Without these income eligibility restrictions, individuals would have been allowed to contribute $5,500-$6,500 (age dependent) annually into an account that grew free of taxes, and then would be able to withdraw these funds tax-free during retirement. While these high earners cannot contribute to a Roth IRA, the limits on the amount that could be invested are also limiting. Fortunately, an alternative exists in the MPP. The MPP does not have any participation restrictions related to income, and contributions are unlimited. This affords high-income taxpayers a viable alternative to the Roth IRA, and a tax favored retirement account that can fit their needs.
Another issue with Roth IRAs is that contributions are only limited to cash. While this may work for some investors, this is not always appropriate for others. For United States (U.S.) residents (or foreign investors with U.S taxable source income such as real estate), who have either highly appreciated investments or income producing assets—the ability to contribute capital assets to a retirement investment in kind can be highly valued.
With the MPP, appreciated assets do not trigger any tax consequences, and contributions are not deductible. Contrary to the Roth IRA, the MPP is also able to invest in non-traditional assets such as foreign investments, artwork or life insurance. This increased flexibility allows investors the ability to capitalize on contributions, and the investment of assets and income, that otherwise would be constrained within the confines of traditional retirement accounts.
Investment restrictions are the third issue with Roth IRA accounts for high-income tax payers. Specifically, Roth IRAs are subject to the Unrelated Business Taxable Income (UBTI), which impacts the ability of tax payers to contribute real estate that uses debt-financing, or business interests that are producing income. These types of investments would usually be subject to UBTI with a Roth IRA, but since the MPP is treated as a grantor trust, the Foreign Investment in Real Property Tax Act (FIRTPA) does not apply. This means that the tax payer can contribute business interests or assets in kind, which presents as a distinct advantage over Roth IRAs.
Lastly, although the Roth IRA is not subject to required minimum distribution requirements that traditional IRAs and pension assets face, distributions may not be made earlier than age 59 ½ without adverse tax treatment. The MPP is advantageous in this arena in that distributions from the plan are allowed as early as age 50. The U.S.-Malta Income Treaty allows for distributions to be non-taxable to U.S. tax payers, if the distribution is also non-taxable to Maltese tax-payers. This means that an initial lump sum of up to 30% of the value of the MPP can be distributed as early as age 50, but the second lump sum cannot be distributed tax-free until year three. On year three and every year after a lump sum distribution can be distributed with tax free treatment on the second and subsequent lump sum distributions up to 50% of the value of the MPP. Other distributions can be made prior to age 50 but these distributions are taxable under IRC Sec 72 for U.S. tax-payers, which treats part of each distribution as a return of principal and part as capital gains or ordinary income dependent upon the type of asset.
Ultimately, while Roth IRAs are an investment option that many high-income tax payers would like to pursue, the eligibility restrictions, contribution limits, UBTI and transaction limitations make it hard to actualize. The MPP provides a desirable alternative with significant advantages for high-income and high-net-worth investors, and parallels the benefits found in the Roth IRA.
Notably, the improved eligibility and absence of contribution limits, as well as the increased contribution options for business interests or assets in kind are distinctly advantageous with the MPP. This is in addition to the ability to make distributions at an earlier age from a deferred income on a tax-free basis. For those facing challenges with the Roth IRA, the MPP is worthy of consideration for long-term planning and investment efforts.