Part two of the series where I answer questions that people have asked me about Self Directed Retirement Accounts.
Question: “Can I buy a vacation house in another country with my self directed IRA or Solo 401k?”
Answer: “Yes, you can, but legally, you cannot use the house for your own benefit. In other words, the whole point of investment inside of a retirement account is for the benefit of the retirement account….therefore, you could not take a vacation at this house. Of course the point of your retirement account is for the benefit of you – when you retire. So, until you retire, you cannot use the vacation house. I don’t know how anyone would know that you used the house, but regardless, it would not be legal, as far as the IRS is concerned. I suppose if you went through a nasty divorce and your spouse wanted to stick it to you, they could tell the IRS that you took vacations in the house, and the IRS could look into it. Another thing to consider is that you cannot do any handyman work on a house that is owned by your retirement account; you need to farm that work out to a contractor. Again, I don’t know how anyone would know that you fixed a leaking toilet, or patched the roof on your beach house in Nicaragua, but technically, it is not allowed.”
Remember that when I say illegal, it is not a jail time thing, but you could lose more than the value of your account; that’s nothing to sneeze at.
You could buy a condo in Mexico, and rent it through a rental program with a management company, and the money would go into your Solo 401k – tax free. This money would grow, tax free until you start taking distributions, then the distributions would be taxed at whatever income tax rate you are in at the time.
Alternatively, you could set aside a portion of your account as a Roth, and use those funds to make payments on your condo. When you retire, you take the condo as a distribution, and since you already paid taxes, you pay none.
I think making an investment in foreign real estate is a great choice for inside a self directed account, but you need to stay within the guidelines. Investing in emerging markets is exciting, fun, and creates true diversification. Hell, you might even make some money!