Buy Your Slice of Paradise
Today Using IRA Money Tax-Free
Now is the time to turn your
dream of retiring overseas into reality via self-directed IRAs
By Sharon
Faiola Petersen, Guidant Financial Group
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September 2007
| Most of us
have the picture of our dream retirement home tucked away in a corner of
our mind. Maybe it’s 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’s 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 hot real estate. This means that the charming condo
you’ve had your eye on ever since you honeymooned in some slice of paradise
may no longer be there by the time you retire. Or it will be so exorbitantly
priced, it will be untouchable. So the time to buy is now.
Don’t 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 retirement funds before you retire 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’t purchase a house that you will live in now, you can buy it, rent
it out and funnel that money tax-deferred back into you IRA. Or you can
just let the property build equity within your IRA for the time being.
Once you hit retirement age (59 1/2 when it comes to IRAs) you can take
your standard distribution and essentially purchase your dream home from
your IRA.
Sounds almost too good to be true,
doesn’t it? But, surprisingly, such transactions have been possible with
IRAs ever since 1974 when the Employee Retirement Income Security Act (ERISA)
gave account holders the right to personally direct their retirement monies
into investments of 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. |
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Self-directed 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 is smart. While you may not be
able to travel the world now using that rental money, it will be growing
inside your IRA. And you’ll have the reassurance of knowing that your dream
retirement home is waiting for you to take occupancy when the time is right.
The establishing of a self-directed
IRA is an involved process, so you’ll want to work with an “account facilitator”
who specializes in these unique account structures. Account facilitators
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. By
contrast, traditional “IRA custodians” allow foreign investments but charge
a percentage fee for each transaction and then must coordinate the transaction.
According to David Nilssen, president
and CEO of account facilitation company Guidant
Financial Group, increasing numbers of people are discovering the joys
of self-directed
IRAs. “The majority of our clients are Baby Boomers who are now taking
a much closer look at their retirement funds and are eager to personally
make those accounts grow faster,” he says. “Buying one’s retirement home
as an IRA investment is particularly popular with our clients. And in light
of today’s housing market woes, foreign real estate investments are growing
hotter by the day.”
The buying 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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