Paying off investment property morgage with IRA
I am 61 years old and have a rental property I use for income. I’d like to increase that income by paying off the mortgage on the property with the funds from either my regular or Roth IRA. It’s an excellent property so I do intend on keeping it. I understand I can move the necessary funds into a self-directed IRA but then have some questions:
Should I use the Roth or the regular IRA?
Will I be able to withdraw the additional income derived from the property? I assume I would pay regular income tax on that. Am I correct?
Any other considerations?
Thanks
Permalink Submitted by mk foss on Fri, 2012-06-01 17:52
I’m not sue exactly how you intend to accomplish this. If the IRA or Roth IRA paid off the mortgage company and became the new lender on the property – it would be a big problem. You can’t borrow from your IRA or Roth IRA. That’s a prohibited transaction and could disqualify the IRA.
If you took a withdrawal from either the IRA or Roth to pay off the mortgage you could have income tax consequences. For the TIRA, the funds withdrawn would be taxable to you as ordinary income. The 10% penalty is not a factor because you’ve passed 59.5. If you took money from the Roth, the distribution would be only taxable (1) if the Roth had been in place less than 5 years AND (2) if the withdrawal exceeds the total of Roth contributions and conversions.
The question is – is the continued tax free growth in an IRA or Roth preferable to the additional cash income from the rental. The answer depends on your tax bracket and how the IRA investments are performing.
Permalink Submitted by betty maar on Wed, 2012-06-13 05:52
There are many differences between the two IRAs. The primary one has to do with whether you take the tax savings up front or at the end of the retirement period. You can contribute up to $5,000 with a traditional IRA per year and do it with pre-tax dollars. This saves you money during the year of contribution. In contrast, you must use after-tax dollars when making a contribution to a Roth, but there is one huge benefit to it. You get to withdraw the gains tax free when you retire.