If, like many Americans, your greatest source of personal wealth is in your IRA, you may be wondering how to best utilize that investment to safeguard it and watch it grow. You’re not alone. Concerns about the stability of the U.S. dollar have generated a greater interest in all manner of offshore investments—foreign real estate in particular.
It’s important to inform yourself about the Dos and Don’ts of using your IRA in this way.
Here’s some background: IRAs started out with banks, brokerage companies, and insurance companies. Typically you would give your IRA money to these institutions and they would manage it for you. As time passed, some of these IRA providers began to allow their clients to direct their own investments, but that still meant dealing in stocks, bonds, and other traditional items, with a broker taking care of it for you. Generally, this was cheaper and you got to be in charge of your IRA money.
Shortly after the introduction of IRAs, another group of trustees came along and decided to allow clients to buy real estate and other non-traded assets with their IRAs. These became alternative self-directed IRAs.
That’s how you can purchase real estate with your IRA. In fact, it has been legal to do this since IRAs were invented over 30 years ago. And it’s easy to do.
Currently there are about 20 major custodians that offer IRAs that can hold alternative, non-traded investments (like real estate). The reason there are so few custodians is that each IRA is different and there’s a higher degree of complexity with these IRAs.
When choosing one of these custodians, you should choose a very big company that follows the rules.
For a comprehensive list of what you can and can’t invest in with your IRA, you’ll need to look at IRS Publication 590. This is an exclusionary publication…in other words it tells you the things that you cannot invest in. So if it’s not specifically listed in that publication, then you can invest in it. Here are just some things you can’t invest in:
- Life insurance
- Collectibles (for example, antiques, cars, stamps, furniture etc.)
- Capital stock in a S corporation
One of the major mistakes people make when dealing with these IRAs is that they do the transactions—called “self-dealing” by the IRS. You cannot handle transactions yourself. So you can’t sell to and from your IRA, you can’t borrow from your IRA, and you can’t have descendants do any of that. So you can’t own certain assets and there are certain people you can’t do business with.
You can buy foreign real estate with your IRA, too—it has long been completely legal to do so—but it’s not as simple as buying real estate in the U.S. (Plus, you can hold a mortgage with your IRA but that mortgage needs to be non-recourse.) Most foreign countries do not recognize your IRA account as a separate legal entity and therefore your IRA can’t buy the real estate.
One question I’m often asked is: Will the IRS be changing the self-directed IRA regulations any time soon? I don’t know, because I don’t know what the future holds. However, as this is an area of the tax code that is so broad based, it is unlikely we will see significant changes any time soon.
Editor’s note: For Nick’s full report on what you can do with your IRA…and a “little black book” for the offshore world…plus video sessions with some of the top offshore experts right now…and more…go here. (But don’t forget, you only have until midnight tonight to get access at a massively discounted price.)