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How To Use A Checkbook IRA

How To Access Your IRA Funds For The Purchase Of Foreign Real Estate

You likely recognize that buying real estate overseas is a smart part of any asset-protection and diversification plan right now. Unfortunately, though, a big part of your retirement funds and net worth may be tied up in some kind of retirement account, a 401k or an IRA, for example.

Most custodians of these kinds of accounts don’t allow for “non-traditional” types of investments such as foreign real estate.

The important thing to understand is that it’s not that you can’t use your IRA funds to invest in real estate. It can be, though, that your custodian doesn’t want you to…either because he doesn’t want (or understand how) to deal with the required paperwork or, more often, because he makes more money if you invest in one of his preferred investment products.

To buy real estate–foreign or local–with your retirement funds, you can set up what’s called a “self-directed IRA” or “self-directed 401k.” In theory, this means you’re in a position to “direct” the investment of your account funds. However, you still must go through the custodian, asking him to make the investment for you. He can refuse.

The best (in some cases, depending on what you want to do, the only) way, therefore, to take control of your IRA funds is to establish what I refer to as a “Checkbook” IRA.

To do this, you set up an account with a self-directed IRA custodian. Then you create an LLC (I’d recommend an offshore LLC if your intention is to purchase foreign real estate), in which your IRA invests all its funds. Then you, as the president/manager of that LLC, invest the funds of your IRA as you like.

This structure allows you to eliminate the paperwork (and the review process) otherwise required each time you invest in something “alternative.” You simply write a check from the LLC’s bank account to make the buy.

This structure is the most straightforward I know for using retirement funds to invest in real estate overseas. I’ve seen many people get far into the buying process and then hit a wall with their planned purchase when it comes time to title the property in the name of their IRA account, as is required for IRA investments. Most countries’ legal systems don’t know what an IRA account is, and they have no idea or no way to title a property in the name of such an account.

One thing to remember when investing with a self-directed IRA is the self-dealing rules. For example, and broadly speaking, you can’t have your IRA buy real estate from you directly. You can’t have your IRA invest in any business you own or operate. And you can’t have your IRA buy a property and rent it out to your business.

In addition, and importantly, note that you can’t use your IRA self-directed funds to buy real estate for personal use; the property must be an investment. You can’t buy a vacation home with IRA funds, for example, and then spend three months a year using it.

However, you could buy a piece of real estate with the plan to rent it out until you retire. Then, once you do retire, you could take the property as a distribution from your IRA and move in…and live in it.

The concept is straightforward, but getting the structure set up requires some work. Basically, as I said, you move your IRA to a custodian that allows “non-traditional” investments. The IRA funds go into an account with this custodian. Then you set up an LLC (and a bank account for that LLC), into which your IRA invests its funds.

You are appointed the manager of the LLC and, as such, you direct the investments of the LLC. You’re able simply to write a check for any investment you want to make.

The LLC makes the direct investments, not the IRA, so you don’t have to fill out the forms and get approval from the custodian for every piece of property you want to buy with your IRA funds.

Also, it’s easier to get a piece of foreign property titled into the name of an LLC than it is into the name of an IRA account. An LLC is a legal entity that can be recognized on a property title in most any country.

I’m going through this process myself right now. In my case, the primary motivation is a desire to diversify all assets and capital out of the United States. To this end, I’m converting my IRA to a Checkbook IRA with the intention of then using those funds to purchase a rental investment property in Medellin.

 

Lief Simon

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