Can I use self directed IRA to pay off the property that I’ve already own?

Question:

I have a situation where I bought a rental property with 2 step loan. The first loan is IRA loan, actually from Quest IRA, Inc. client. Then when it comes to refinance, it seems like I might have a problem that I could not be qualified for loan. So, I am wondering if I set up IRA, could I use that money to pay off the first loan?

Answer:

Unfortunately, the answer to your question is no, you cannot.  It is a prohibited transaction to use your IRA for your personal benefit right now, as opposed to taking distributions from the IRA when you retire.  If you are under age 59 ½ you can take a distribution from your IRA to pay off the mortgage, but of course that would mean you would have to pay a 10% premature distribution penalty in addition to any taxes owed if the IRA were a traditional or other pre-tax plan.  If you are over age 59 ½ the only issue is whether or not the distribution is taxable, which depends on what type of IRA it is and whether you have any after tax basis in the account.  As you already know, you can use your self-directed IRA to loan money to other investors, but not to yourself or any other disqualified person.

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