Purchase a Piece of Paradise With a Self-Directed IRA
Now could be the time to turn your dream of retiring overseas into reality via a self-directed IRA
Most of us have the picture of our dream retirement home tucked away in a corner of our mind. Maybe it is a 200-year-old cottage with herb-filled gardens in the south of Spain, or an airy beach-house along the Pacific in Costa Rica.
Well, it is time to dust off that vision and act on it—because desirable overseas properties are being snapped up at incredible speeds by those desiring vacation homes or simply wishing to invest in real estate. This means that the charming condo you have had your eye on ever since you honeymooned in some slice of paradise may no longer be there by the time that you retire, or it will be so exorbitantly priced that it will be unaffordable. So the time to buy is now.
Do not let a lack of capital dissuade you from making that purchase. Thanks to specially structured retirement accounts called “self-directed IRAs,” you can use your pre-retirement funds to buy your retirement home today. And to make the investment, you don’t have to take a distribution or pay taxes or penalties for using that money. While you can not purchase a house that you will live in now, you can buy it, rent it out and funnel that money tax-deferred back into your IRA. Or you can just let the property build equity within your IRA until you retire. Once you hit retirement age (59 1/2 in relation to IRAs) you can take your standard distribution and essentially purchase your dream home from your IRA.
Sounds almost too good to be true? Surprisingly, such transactions have been possible with IRAs since 1974 when the Employee Retirement Income Security Act (ERISA) gave account holders the right to personally direct their retirement monies into assets their choosing, including real estate. And because the investment is made on behalf of the retirement account—just like the IRA investing in stocks and bonds—the acquisition is made without triggering a taxable event.
Self-directed IRAs and Real Estate IRAs come with an important caveat: You are required by law to avoid any “self-dealing” transactions that create a conflict of interest between you (the account’s fiduciary) and the account itself. In other words, every purchase/investment must be made to the exclusive benefit of the IRA. So the real estate you purchase with your retirement funds must be used for growing your retirement account.
This is why leasing out your future retirement home is not only allowable, but smart. While you may not be able to travel the world now using that rental money, it will be growing within your IRA, and you will have the reassurance of knowing that your dream retirement home is waiting for you to take occupancy at retirement.
The establishing of a self-directed IRA is an involved process. Therefore, you will want to work with a qualified provider who specializes in self-directed IRA LLCs. Self-directed IRA LLCs give the IRA holder checkbook control of IRA funds, which means you can literally write a check on the spot to make a purchase or investment.
The purchase of a retirement home combined with investing in high-demand foreign property is an ideal combination. Investors might call it a match made in heaven. And someday—sitting on the front porch of your exotic Belize bungalow or sprawling Malaysian plantation—you might call it a match made in paradise!
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