Buying Property Overseas With Rollover IRA

A friend of mine is looking to buy a condo in Thailand. She is single, retired and 60 years old. She’s planning to use funds from her Rollover 401K to make the purchase. But doing so she will take a huge tax hit. She doesn’t make a lot of money in retirement and lives off her savings. So this will add greatly to her income. Roughly 7x her current income. This tax hit will add about 20% to the cost of the Condo.

Can she get a loan from her Rollover to buy the condo? Then pay the loan back to her Rollover?

From what I understand if it’s an investment property and she wasn’t going to live in it, she could use the Rollover (without taking a tax hit). Anybody know anything about all this?

Thanks

Can she get a loan from her Rollover to buy the condo?

It’s not clear what kind of account you are talking about here. But I don’t think it matters.

If the money is in a 401k plan, loans are allowed, but only to employees of the company sponsoring the plan. If she is retired, she is no longer an employee and can’t get a loan from her 401k plan.

If the money is in an IRA, loans are prohibited transactions. Any purported loan would be treated as a distribution and be taxable income.

–Peter

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From what I understand if it’s an investment property and she wasn’t going to live in it, she could use the Rollover (without taking a tax hit). Anybody know anything about all this?

If you have a specific type of IRA, known as a “self-directed IRA” (different than ‘self-managed’), it is possible to purchase investment real estate within the IRA. However, by doing so, there are a lot of rules that must be followed:

  • The owner of the IRA cannot use the real estate property for their own use (either living or vacationing), since that would be considered self-dealing
  • The owner of the IRA cannot manage the property themselves - there must be a property manager
  • The IRA must pay for all expenses for the property, so if there is a large assessment for the condo, she’s going to have to pay that assessment out of other funds in the IRA
  • The custodian of the self-directed IRA must allow that type of real estate to be purchased - since it’s a condo in a different country, she would need to confirm with the custodian that would be allowed
  • It is difficult to get a loan for real estate that’s owned by an IRA, because only non-recourse loans are allowed
  • Even if the IRA owner can find a loan for the property that’s owned by the IRA, the IRA will need to make the payments on the loan - since those are an expense
  • She will still be subject to RMD requirements, which means that the property will need to generate enough income to pay those RMDs, or she will need to sell it

I will also note that self-directed IRAs often carry significant annual fees and set-up fees.

AJ

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You can own real estate in a traditional IRA, subject to a number of restrictions. I have done this. Perhaps roll the 401K into a traditional IRA, then purchase the property?

Tim

Perhaps roll the 401K into a traditional IRA, then purchase the property?

Yes it’s a 401k rolled over (Rollover IRA) into a traditional IRA. But per the previous post it’s looking like she’ll have to take the money out of her IRA, pay cash for it, and take the tax hit. Thanks

Does she own a home here in the U.S.? Could then look at doing a cashout refinance and using the proceeds to pay for the condo.

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Does she own a home here in the U.S.? Could then look at doing a cashout refinance and using the proceeds to pay for the condo.

Good idea, but no she doesn’t. Also she decided the tax hit was too much.