One of the questions I hear most when speaking at conferences is, “Can I use my IRA to own a property overseas?”
The simple answer to that question is yes. However, the unspoken question that people often wonder is, “And I can use it immediately, right?” The answer to that is NO! Your IRA must be 100% investment. The good news is that by Rothing your IRA, it is possible to use your IRA for an investment property now. And in the future, you can take your real estate as a distribution and use it as your vacation or retirement home overseas. A good friend of mine, Glen Mather at NuView IRA, wrote an article that tells folks exactly how this process works. So, we’ll have Glen say it in his own words.
Rothing Your Way to Your Dream Retirement
In Orlando, I’m smack dab in the middle of one of the largest migrations in the history of our country.
The baby boomers are abandoning the Northeast in hordes, some dropping off in the Carolinas, but many more seeking the more consistent warmth of Florida. Bloomberg says that almost 600,000 Americans moved from the Midwest and Northeast to the Sun Belt states last year, the most since 2005.
Seems like, for the last ten years, few prospective retirees relocated, due to difficulty selling their homes. Now, either the prices have recovered, or they decided they aren’t going to suffer through winter any longer. How many boomers are likely to move in the future? A whole lot, as half of them haven’t even reached the age of sixty.
Dreams of relocation to a warmer place are not limited to Florida. Over 400,000 U.S. citizens receive their social security checks at a foreign address, and many more relocate on a full-time or part-time basis long before they register for benefits. Chances are for every citizen that actually moves abroad in their retirement years, there are ten that simply say, “I can’t afford it.”
Turns out, perhaps, you can – and your financial advisor or CPA may not fully disclose your options.
I’m writing this article at a seaside resort in Nicaragua, having recently left a beach condo in Belize, both areas frequented by visitors in their 50s. Speaking with many of the guests, I ask them whether or not they would consider living outside of the U.S. at least several months of the year, right where they were staying. Perhaps it wasn’t surprising that most indicated their desire to do so, as they already were experiencing the benefits.
Ah, but how to afford it? How about your IRA? No, not take the funds out, but rather convert it to a Roth IRA and change your options. This approach may be especially interesting if you are trying to decide where you want to retire, even while you may still be working.
Let’s say you visit a tropical highland location in Costa Rica, with cool breezes at night and a short drive to the beach. The resort is exactly what you think you want, and they offer both rentals and casitas for purchase. There is a close-out on the perfect unit with a one-of-a-kind view, and it seems like just the place that you and your wife would enjoy six months out of the year. Oh, and you are 55 years old.
You are leaning towards doing it, but you are not interested in financing it at 10%, nor do you feel comfortable about financing a second home at all. Perhaps you could look to your IRA, especially if you are certain that you do not want to personally use the property you buy for at least five years.
Take a close look at converting your SEP, Simple, or Traditional IRA to a Roth. You may also be able to roll over an employer plan like a 401k to a Traditional IRA, then convert. Why do that, and voluntarily pay tax on the converted amount? It’s all about the options you now have five years from now.
Take your IRA and convert it to a self-directed IRA, there are several reputable custodians that can handle that for you. This is the first step to putting yourself in position to purchase properties with your IRA. Next, submit a brief form to your custodian to convert your pre-tax (traditional) IRA to a Roth. You will be taxed on the converted amount on your tax return for that year.
Purchase the real estate in your newly minted Roth IRA, and place it into the resort rental pool. All net receipts of the rental are simply deposited into your Roth IRA account at your custodian.
Once you achieve the age of 59.5 years, and it has been at least 5 years since you converted to a Roth IRA, you are able to take a full distribution of your Roth IRA without penalties or taxes. In your case, you can take a distribution of the property – moving it from the Roth IRA to your individual name, completely free. Better yet, all the rental earnings for the past five years can stay in the Roth account and be re-invested, or withdrawn, all based on your choice.
But let’s say you change your mind and decide that you don’t want to retire to Costa Rica after all, but prefer Belize. No problem – just sell the property in Costa Rica in your IRA, and move the funds to the Belize property. You can take a distribution anytime, once again, because you are at least 59.5 years old and converted more than 5 years ago.
Will this work for vacant lots as well? Certainly, as you are able to invest in unimproved land in a Roth IRA. It may be a good way to lock in the price of the underlying real estate while deferring the cost of building until you retire and better know your needs.
Paying taxes voluntarily is a strange thing for most people to consider. But think of it as this – why pay tax on the harvest instead of on the seed? Most people will face a retirement that will require them to pay income tax on all their earnings for the rest of their lives. Those that hold Roth IRAs will have an option of taking distributions for the rest of their days with no taxes for them, and in most instances, even for the lifetime of their heirs.
Thanks, Glen, for the powerful insights on tax-advantaged ways to move into retirement.
One of the most exciting possibilities this opens up for retirees is how to buy into their retirement property overseas with the proceeds of their IRA, as long as they follow the Roth rules for distribution. The advantage, obviously, is that if you have the funds in an IRA to acquire a property that you’d like to live in someday, in many cases, these are the funds that are currently available. While inside your IRA, this is an investment that earns a return for you. And when you’re ready to use it, you can take it out and enjoy it.
For more information, send us a quick note here and we’ll be happy to introduce you to Glen or talk to you about property options that may make sense for you, as you think about retiring or owning property overseas.