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How to Use Your IRA to Buy Real Estate Overseas
By Matthew Apodaca
Owning an investment property overseas can be a smart—and lucrative—way to truly diversify your portfolio. In the right markets, overseas real estate can generate excellent rental returns and increase handsomely in value over time, giving you a generous profit when you choose to sell.
But you often need cash on hand to make this kind of purchase. And for many folks, that can prove a hurdle. What you may not realize, however, is that—done right—it’s possible to tap your self-directed IRA or 401(k) retirement funds. In other words, you may have a pot of money at your disposal that you didn’t even know you could use.
Sounds great, right? It can be. Not only can you access more money to buy that investment property, but you can also defer paying state and federal income tax on said property.
Having said this, buying real estate with your self-directed IRA funds is not without its drawbacks. You can’t, for instance, buy your new home overseas (unless you want to pay the full tax); you can only buy an investment property. And there are some very important (and taxable) mistakes you’ll want to avoid.
With your standard IRA or 401(k), you have a fiduciary custodian that is responsible for your investment choices. This person is tasked by the IRS with making sure you follow the rules and invest your retirement money prudently. As a result, fiduciary custodians offer you a limited choice of investment options, usually specific mutual funds.
But by rolling over an IRA or 401(k) into a self-directed IRA, most of the investment restrictions go away, and you take on the full responsibility for your investment choices.
Let me give you an example.
Meet Todd. Todd has worked hard all his life to save $300,000 in his IRA. After doing some research, he has found some condos in Costa Rica that he thinks will be great for rental and capital growth. Todd doesn’t have enough cash at hand to buy the condos…but the value of his current IRA is more than enough to cover the investment.
He can take the amount directly out of his IRA, but he will have to pay the IRS income tax on it and potential state tax as an IRA distribution. If Todd is still earning income, he may have a very large tax bill at year-end.
Or Todd can roll his money over to a self-directed IRA, buy the condos, and defer paying tax on the amount until later—when he takes the money or property out of his IRA. Todd must avoid mistakes and remember to keep his tax bill down by putting all the rental money he earns into a bank account owned by the self-directed IRA.
If he deposits rental money into a personal bank account, one just in his own name, the rental amounts will be treated like taking an IRA distribution…and they’ll be taxable at his ordinary income-tax rates. Rental expenses should be treated the same way, being paid only from the self-directed IRA bank account.
When Todd is ready to sell, he can defer the tax if he keeps the proceeds from the sale in his self-directed IRA bank account. Remember, tax deferral does not make taxes disappear. It just delays paying tax until the money or property is withdrawn by you or your beneficiaries.
Investing wisely in overseas real estate can produce steady income and tremendous profits when done right in markets that make sense. By layering in the tax-deferral benefits of owning through a self-directed IRA, you can maximize your upside and grow your retirement account in a truly diversified way.
Editor’s note: When it comes to taxes, deferring them, like you’ve just read about when buying real estate overseas with your 401(k), is almost as good as avoiding them altogether. By having the right plan, and using the right strategies, in the right places, you can take advantage of money-making, money-saving options that most Americans never hear about. We have an Offshore Escape Plan for you, all ready to go. Get the details of tax-reducing, privacy-enhancing secrets and techniques that could transform your life for the better here, for free. But you only have until midnight tonight to get access to this special plan.
