CA Business Entity Qs: SDIRA Investing vs. Cashflow Portfolio

[Reginald Willhite]

Hi All!

I'm new to BP and so far love the environment. Had a quick question about business entity formation in California. I'm currently in the very early stages of trying to roll an old 401k into an SDIRA and use the $22k worth of funds to get me involved in my first deal. From what I can gather, LLCs are generally used for such a transaction? But...If I wanted to engage in other REI deals with money straight from my savings account, would I have to form a separate business entity in order to take part? Any recommendations on what entity a California resident looking to do both in-state and out-of-state deals should use (LLC vs C-Corp vs S-Corp)?

[Brian Eastman]

@Reginald Willhite

An IRA will not get YOU involved in YOUR first deal. Anything falling within that description would be self-dealing and result in severe tax penalties for the IRA.

A self-directed IRA allows the IRA to diversify beyond the stock market into assets such as real estate and private lending, but everything is done through the IRA and exclusively for the benefit of the IRA. You cannot mix IRA and personal funds or otherwise personally benefit from the IRA.

With $22K, I would recommend against a self-directed IRA LLC in California. The setup and maintenance costs will be prohibitive and eat up any potential differential in returns that you may be able to generate in real estate as opposed to other IRA investments. A California LLC will cost at least $1,000 to maintain between the associated IRA fees and the $800 minimum CA franchise tax. It would take a 4.5% ROI just to cover your admin costs and break even.

You could look at simply opening a self-directed IRA with a low fee custodian like IRA Services Trust Co in the Bay Area or Kingdom Trust Co in KY. That account would not provide the same level of checkbook control, but would be well suited for something like a crowd fund or private lending transaction.