California Self-Directed IRA
California is a beautiful state, blessed with mild, pleasant winters all year round, an abundance of breathtaking scenery, great beaches and surfing, decent skiing and lovely mountain ranges.
It’s also incredibly costly.
California has a lot to offer, but it’s perhaps the least retirement-friendly state in the union, with a high cost of living, the highest sales taxes in the country, and some of the highest state income taxes in the country.
According to a recent study, retirees who rent in California spent 66% more a month than the average retiree in the rest of the country, $1254 versus $753. So, if you are planning to retire in the Golden Gate, start saving aggressively – you are going to need a big nest egg to withstand California’s combination of high taxes and a high cost of living.
And, of course, California is tremendously blessed in things to spend money on, as well, with many cities with thriving cultural scenes and world-renowned restaurants. You will have no problem finding ways to part with your hard-earned money.
Golfing enthusiasts have plenty of world-class golf courses to choose from. Out of the best 100 golf courses in the country as determined by the editors of Golf Digest, twelve of them are in California, to include Cypress Point Club, Monterey Peninsula, Pebble Beach Golf Links and Spyglass Hill in Pebble Beach, Los Angeles Country Club, Riviera Country Club in Pacific Palisades, the Olympic Club (Lake) in San Francisco, the Valley Club of Montecito, the Quarry at La Quinta, The Preserve Golf Club in Carmel and the Mayacama Golf Club in Santa Rosa.
Why a California Self-Directed IRA?
Stocks. Mutual funds. CDs. Bonds.
For years, you have heard that these are the types of investment vehicles through which to secure your retirement. The stock market tends to appreciate over the long haul, after all, and bonds are conservative and low on risk. Mutual funds have popped up in recent decades as one of the most popular investment vehicles as well, closely monitoring certain aspects of the stock market.
What most people do not know is that these are not the only investment types available for retirement.
In fact, if you choose self-direction, you will find that the IRS allows for all sorts of different types of investments in a retirement account. You can invest in gold and precious metals, real estate, private companies, and more. There are a few select limits on the sorts of investments you can make, but the good news is: you often have more legal options than you have limits.
For many people, a California Self-Directed IRA means freedom, opportunity, and self-determination. It means not being satisfied that the “market” is the only market that exists. It does not mean you have to switch away all of your old investments. But if you want to invest in real estate or gold to help ensure a secure retirement, those options are indeed open…
And, like other IRA types, California Self-Directed IRAs come with all sorts of investment protections.
Understand Your California Self-Directed IRA Plan Options
Let’s take a moment to consider the various retirement account types:
- Traditional Self-Directed IRA: A retirement account in which you can invest pre-tax or after-tax dollars, and in which your investments grow tax-deferred, meaning you will pay taxes on them once you begin withdrawing them. When you start making retirement withdrawals–defined as withdrawals after you turn 59.5 years old–the money is treated as income.
- Self-Directed Roth IRA: Similar to a Traditional IRA, except you make after-tax dollar contributions so you are paying taxes on the front end. This allows your investments to grow tax-free. After the account has been established for 5 years and after you turn 59.5, your withdrawals are tax and penalty-free.
- Traditional 401(k): A qualified plan that allows employees to make pre-tax elective deferrals. Business owners who want to self-direct can use these as well and allow employees to self-direct their accounts.
- Self-Directed SEP IRA: Simplified Employee Pension that allows employers to make contributions to the retirement of their employees. An employer can also contribute to their own retirement with a Self-Directed SEP IRA.
- Self-Directed SIMPLE IRA: Savings Incentive Match Plan for Employees. A “tax-favored” plan that small businesses and individuals can set up for their employees.
- Self-Directed Solo 401(k): A 401(k) plan that a self-employed individual can use for retirement that offers high contribution limits.
As noted throughout, these same accounts offer a high degree of self-direction if you want to direct your own accounts.
A Variety of Investments
One of the chief benefits of directing your own retirement account is that you get to choose your investments from a wide range of options:
- Real estate: Apartment buildings, commercial property, retail space, raw land, etc. If you want to earn an immediate income for your retirement account with your investments, rent can be one of the most powerful ways to ensure that. You can also use leverage in a California Self-Directed Real Estate IRA when using non-recourse loans.
- Private IRA Lending: You can negotiate the terms, interest rate, and length of the loan, as well as other variables like the monthly payment amounts and whether the loan is secured or unsecured.
- Private companies: Public stocks are what most people think of as “investments,” but there are also private stocks to consider. There is a lot of opportunity for growth in private company stock, but also plenty of risk to consider.
- Tax liens: With a high rate of return, these investment types are ideal for self-directing investors with smaller accounts.
- Precious metals: Gold, silver, platinum, palladium. These metals are famous as a “hedge” against economic downturn, which is why many people turn to them as a way to avoid putting all of their eggs in the stock market basket.
- Single Member LLC: An investor can create an LLC to be owned by their California Self-Directed IRA, managing it themselves. This gives a significant degree of protection; however, you will likely want to consult with a professional to learn how to do this properly.
What You Can’t Do with a California Self-Directed IRA
As fun as it is to talk about the various options you can have with a self-directed retirement account, it should be noted that there are certain limits, as well. You cannot self-direct a retirement account to invest in life insurance, collectibles like art, gems/jewelry, coins, alcoholic beverages, and tangible personal property. As enticing as it might be to put that wine cellar under a Self-Directed IRA protection, it’s simply prohibited–so look for your protected retirement investments elsewhere.
Who You Cannot Do Business With
A disqualified person is anyone the Self-Directed IRA has decided is not “arm’s length” from the IRA. Your IRA cannot engage in any transactions with these individuals or you risk the tax-status of your IRA.
A Disqualified Person is:
- Your spouse
- Any of your lineal ascendants or descendants (parents, children, grandchildren, and the spouses of children, grandchildren, etc. – including legally adopted children).
- Any investment providers or fiduciaries of the IRA.
- Any entity (a corporation, LLC, trust, etc.) where a disqualified person owns more than 50%.
- Any entity (like previously listed) where the IRA account holder is an officer, director, a 10% or more shareholder, or a highly compensated employee.
Although we have thrown a lot of abbreviations and words at you, you should know that self-directing your retirement is not as complicated as it might sound. The steps are very simple:
- Open a California Self-Directed IRA with American IRA. Make sure to put thought into the type of account you would like to open; review the options available to you and select the one that makes the most sense for your individual situation.
- Fund your account. This is where the options can throw people off. Let’s take a look at them quickly:
- Contribution: Simply putting money into the account throughout the year. This is what a lot of the funding will look like once the account is already opened.
- Conversion: Withdrawing part or all of the cash/assets from a Traditional IRA and putting them into a Roth IRA is called a conversion. Once the cash/assets are distributed, you have 60 days to put them in the Roth IRA account.
- Rollover: A tax-free distribution of cash/assets from one account to be put in another retirement account. You are permitted one rollover per year.
- Transfer: Transferring cash/assets directly from one retirement account to another retirement account. Because you do not take direct possession of the cash/assets, you are allowed unlimited transfers and there is no tax.
How it Works
1.) Open an American IRA Self-Directed IRA
- Select the type of account that you would like to open.
2.) Fund Your Account
- Move money into your account by transfer, rollover or contribution.
3.) Select an Investment
- Find an asset you want your IRA to purchase and submit an Investment Form. American IRA will work with you and your professionals for a smooth closing.
4.) Review the Instructions
- Visit the “How it Works” page on our website to review the instructions for the asset you want to purchase and submit the paperwork required for the investment you have chosen.
5.) Provide Payment Authorization
- Submit Payment Authorization Forms for expenses that pertain to the asset your IRA has purchased.
6.) Submit Deposit Coupons
- Deposit income generated from the asset your IRA purchased by submitting a Deposit Coupon along with the funds.
Tax and Financial Considerations for California Self-Directed IRA Owners
California is a tremendously expensive state to retire in, even before you account for your personal and property taxes. According to Sperling’s Best Places, California has a cost of living index of 168.6, which means it’s more 2/3rds again more expensive than the national average.
The cost of housing is the primary culprit: The median home cost in California as of April 2019 is $548,100, which is much greater than the national average home cost of $216,400 – 193 percent more expensive than the rest of the country.
Transportation costs are also very high, In California, also contributing to the high cost of living. And California’s high gas taxes do not help with that metric.
State income taxes on California Self-Directed IRA Income
The Golden Gate State has the dubious distinction of having the highest top state income tax bracket in the country, at 12.3%.
However, that top rate only applies to singles with adjusted gross incomes of more than $572,980, and married joint filers making more than $1,145,960 million, as of this writing in April 2019.
Adjusted gross income in California is calculated after accounting for a standard deduction of $4,401 for single filers and $8,802 for married couples filing jointly.
Nevertheless, California is justly known as a high-tax jurisdiction. It has a progressive income tax starting at 1 percent and gradually climbing from there.
In addition to those income tax brackets, California charges another 1% Mental Health Services Tax on incomes above $1 million.
Social Security benefits are exempt from the California state income tax, but the state fully taxes income from California Self-Directed IRAs and other retirement accounts and pension income.
Military retirement pay is taxable.
If you are a California resident, you will want to be maximizing your tax deductions and other tax advantages through the use of California Self-Directed IRAs and Roth IRAs and other tax-favored accounts.
One strategy is to either maximize deductible contributions during your working years and then retire somewhere other than California, or spend your working years in a low-tax jurisdiction loading up on Roth IRAs and Roth 401(k) accounts and then retiring in California, where your income from Roth accounts generally will not be subject to state taxes.
California sales taxes
At 7.25%, California’s statewide base sales tax is the highest in the country. But it does not stop there: Each county in California adds its own sales tax on top of the state sales tax. Santa Clara County sales taxes add up to 9%, and sales taxes in Los Angeles County are a whopping 9.5%.
Some items, like food for home consumption, most grocery food items and for prescription drugs.
California Self-Directed Real Estate IRAs
California’s effective tax property tax is about 0.77%, which is below average for the United States. Long-time homeowners have benefited enormously from Proposition 13, which limits property tax increases as long as the homeowner lives in the home. It’s still in effect, so that benefits those planning on making California their home for many years into the future. If it was not for Proposition 13, the average property tax in California would be much higher, and it is, for more recent homeowner-occupants.
Property tax is based on an assessment at 100% of full cash value, which is disadvantageous to property owners.
Real estate investors in California will have a substantial tax burden both with the California property taxes and with the income taxes California imposes on rental income. You can shelter your direct rental income from state taxes in the current year by holding properties within a California Self-Directed Real Estate IRA, but unless it’s a Roth account, you will pay California state income taxes on withdrawals.
Another potential tax arbitrage strategy would be to live in a low-tax jurisdiction, open a Self-Directed Roth IRA or Roth Solo 401(k) account with American IRA, and buy rental real estate for tax-free income. This would bypass the high state income taxes in California.
California Estate and Inheritance Taxes
Other California Taxes
California has a gas tax of 60.1 cents per gallon, a diesel fuel tax of 60.4 cents per gallon, and taxes cigarettes at $2 per pack of 20.
Benefits of Retiring in California
If you are interested in seeking retirement in California, or if you simply want to think about it as a long-term option, you might consider a Self-Directed IRA. A California Self-Directed IRA will allow you to handle plenty of different investments under your own control—all while enjoying the tax protections of retirement accounts.
Are you interested in retiring in California? Want to learn more about how to take advantage of all of the retirement capabilities you have? Then it’s time to think about a Self-Directed IRA. Continue browsing this website to learn more about a California Self-Directed IRA or contact us at 828-257-4949 to learn more about how you can secure a retirement for yourself.
About American IRA, LLC
American IRA, LLC is one of the leading third-party administrators for self-directed retirement accounts in the United States. The custodian New Vision Trust Company is a South Dakota regulated trust company. Founder and president Jim Hitt has been investing his own personal assets in Self-Directed IRAs, including Self-Directed Real Estate IRAs, for more than 35 years, and has helped thousands of others declare independence from Wall Street investment companies with their high fees and limited investment menus and become successful Self-Directed IRA investors.
American IRA has offices in Asheville and Charlotte, North Carolina, and Atlanta, GA, but we serve investors from all over the United States and even expats who want to realize the benefits of self-directed retirement investing techniques in California Self-Directed IRAs, Self-Directed Roth IRAs, Self-Directed SEP IRAs, Self-Directed SIMPLE IRAs and even Self-Directed CESAs and Self-Directed HSAs.
A California Self-Directed IRA with American IRA, LLC can help you achieve greater diversification by making it easier to invest in alternative asset classes not commonly available from large investment companies. Self-Directed IRAs also allow you to take more direct control of your retirement assets, while minimizing exposure to needlessly high expense ratios, commissions, wrap fees, 12-b-1 fees and AUM fees commonly charged by Wall Street investment companies. Our much more efficient flat-fee, menu-based fee schedule frequently allows investors to save thousands in fees each year – particularly with larger accounts and buy-and-hold investors.
With a California Self-Directed IRA from American IRA, LLC, you can quickly and easily invest in alternative asset classes like direct real estate ownership, tax liens and certificates, mortgage lending, precious metals, and much more.
To get started, click here to open an account, or call American IRA today at 866-7500-IRA(472).