Did you know that you can purchase an investment property in St. John using your 401k or Self-Directed Individual Retirement Account (IRA)? The stock market is climbing these days, and many of our clients have experienced significant growth in stocks, but it’s always wise to diversify. Real estate is a good option for long-term asset growth, and many of our clients have chosen to purchase investment property here in St. John using Self-Directed IRAs.
Buying St. John real estate with your retirement assets is a great way to get a foothold in the St. John real estate market, even if you’re years away from the dream of retiring and living in paradise. Here’s some more information on how to buy an investment property with your 401k and IRA. You’ll want to consult your personal financial advisor for details that apply to your situation, but we’ve got some general guidelines to get the ball rolling.
How to use your 401k for St. John real estate
In order to avoid taxes, fees, and penalties, you’ll have to make sure to handle this correctly. Your 401k is usually tied directly in with your employer, and they don’t usually let you touch that money until you leave that job. The first thing you can do is to ask your 401k provider if they’ll let you do a self-directed 401k. In this case, you would become the manager of your 401k instead of the investment firm. So rather than choosing the investments that they provide, you’re actually able to choose the investments yourself so you can direct that 401k to a variety of asset types. You can direct a self-directed 401k into real estate; you’d simply purchase an investment property and completely pay it off with the 401k, without penalties or taxes. Another option is to take a loan from your 401k and use that to buy real estate. It’s like taking a loan from yourself, your 401k provider will have a maximum level that you’re allowed to borrow, and over time you’ll pay it back, little by little. As you pay it back, you’re going to be paying interest, but the interest is yours, so you’re essentially taking a loan from yourself. Be aware that if you lose your job or quit your job, the 401k plan provider can require that you pay back that money sooner rather than later so you don’t want to get stuck in that situation.
How to use your IRA for real estate in St. John
Using an IRA to purchase real estate in St. John is a lot easier. You’d simply set up a self-directed IRA. In this case, you are the person that’s in charge of investing the money, you can hire a wealth manager, and they can do it for you, or you can direct those investments into real estate. There are some IRS rules that you’ll need to follow. The first is you can’t buy property from yourself, meaning you can’t direct your IRA into a property that you already own. It’s called self-dealing, it’s not allowed, and you also can’t buy a property that you plan to occupy. This means that you can’t just find your dream home and then take your IRA and use it for the purchase.
The rule is you can’t use it to buy a property that you’re going to live in either full time or part-time, including a vacation home. You also can’t buy property for immediate or extended family members to live in. The investment property must be completely detached from your immediate benefit today because IRAs are meant to benefit you in retirement.
It’s also important to remember that your IRA and you are completely separate entities, and it needs to stay that way. If you use your 401k or your IRA to buy a property and it’s paid in full, it’s very important that that property is in the name of the IRA or the 401k, the paperwork would say your name on it, and then it would have the word IRA in there. You’ll also want to keep in mind that if you make rental income from that property or you sell it, the proceeds need to go back into your IRA.
Those are some of the basic rules about buying real estate in St. John with your 401k or IRA. By transferring assets from a 401(k) or traditional IRA into a Self-Directed IRA, you can access the money for real estate purchases without taking a tax hit for early withdrawal. We work with some reputable companies that can help you with the paperwork to make the process smooth and easy. Our Tropical Properties real estate team can help you find the best investment properties in your price range. You may be able to secure your St. John dream home sooner than you realized!