The question is simple enough: “Can an IRA be used to own foreign real estate?”
The short answer is “Yes.”
You know there’s a “but” coming.
The full answer is, “Yes…but you’re highly recommended to convert it to a Roth IRA before you invest.” This gives you more flexibility when you invest in overseas property, especially if you’re just starting to think about your future retirement plans.
How does Overseas Property Ownership with an IRA work?
Timing is everything. 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. Voluntarily paying tax on the converted amount is really all about the options you are giving yourself five years from now.
First, take your IRA and convert it to a self-directed IRA. This is the first step to putting yourself in position to purchase properties overseas 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. Then purchase the real estate in your newly minted Roth IRA, and place it into the resort rental program. You deposit all net rental receipts directly into your Roth IRA account, managed by your custodian.
Once you reach the age of 59.5 years and it has been at least 5 years since you converted to a Roth IRA, you can take a full distribution without penalties or taxes. In your case, you can take a distribution of the property – moving it to your individual name, completely free. Once it’s distributed, you can use it. Even better, you can keep all the rental earnings from the past five years in the Roth account, reinvest them, or withdraw them, depending on your choice.
Flexibility in Property Investment and Tax-Free Distributions
If you decide that the property is no longer a home base for you, you can sell that property in your IRA and move the funds to your new location. Provided you’re at least 59.5 years old and converted more than 5 years ago, you can take a distribution anytime.
Consider the following. 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 who hold Roth IRAs can take distributions for the rest of their lives without paying taxes. In most instances, their heirs can also benefit from tax-free distributions for their lifetimes.
Following the Roth rules for distribution opens up incredibly flexible possibilities for potential retirees to invest in a property overseas.
