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There are a few retirement fund prohibitions when using your IRA or 401(k) to purchase real estate that you should know about.
Many retirement fund owners don’t even know you can buy real estate in Costa Rica with your self-directed IRA (Individual Retirement Account) or your 401(k) (Retirement Savings Account).
Very few real estate agents in Costa Rica know how you can realize the purchase without running into trouble. At GoDutch Realty, we do have the knowledge and can assist expertly.
First, you must have the cooperation of your IRA custodian. Then you need a knowledgeable local real estate attorney (of course, we can recommend one). And, surely, a GoDutch Realty agent to assist in purchasing.
Self-Directed IRA
The IRS rules permit IRA funds to be invested in real estate in the US and abroad. But they do not require an IRA trustee to offer real estate as an investment option. Many trustees who offer traditional IRA investments, such as depository banks, do not allow IRA owners to invest in real estate. That’s because of the extra administrative burden of real estate management.
As a result, you will have to convert your traditional IRA to a self-directed IRA. A self-directed IRA is an IRA that requires you to decide what investments to make yourself.
Prohibitions
But, before you do all the wrong things, you need to know there are some prohibitions on this type of purchase:
- The IRS rules require IRA-owned real estate to be for investment purposes only. If you use the investment as a residence or your own vacation home before you are 59 ½ years old, you will incur a 10% early withdrawal penalty and tax.
- The key to understanding the main prohibition is the term “disqualified persons.” This term is used regarding IRA-owned real estate to refer to the IRA owner and related persons. This means that while you can partner with someone else, the disqualified persons are: The IRA owner and spouse, ancestors (mother, father, and grandparents), and descendants (children, grandchildren, and their spouses). These include the IRA owner’s investment advisers, any IRA funds trustee, and any business where a disqualified person has a 50 percent or greater interest.
- IRS rules prohibit using IRA funds to purchase real estate from a disqualified person. The rules prohibit a disqualified person from using any real estate purchased with IRA funds as a home or business. These rules even preclude you from purchasing a vacation home that is only partly for personal use and otherwise rented to others.
ROI
Over the years, we have sold many properties to clients using their retirement funds and retirement savings plans. Our clients are US citizens buying before they retire to get their feet wet. Or they buy a building lot, which will appraise while sitting in their 401(k). These buyers don’t want their savings invested in the stock market and earn a better and more secure ROI. If you invest in a rental property, you can count on a 6 – 8% net Return On Investment (ROI).
We are the leaders
GoDutch Realty has been dealing with clients using their retirement funds like IRA or 401(k) to purchase property here since 2006. Our proposal is very simple: use your funds to purchase a building lot and sit on it until the values in the area increase. Or you can use a local builder and build a spec home.
Once you sell the land or the property with the house, your initial investment PLUS the profits both roll back into your IRA account. Your US taxes are deferred. They will stay in your IRA account until you decide to make the next real estate investment or when you’re ready to retire.
But before you decide, please talk to your custodian, attorney, and realtor, and make sure you understand the rules, how it works, and the retirement fund prohibitions. Ready to see what we have to offer? Then contact us now so we can assist.
