EP 23 – The Coverdell ESA and How to Maximize it!

The Coverdell ESA – or Educational Savings Account is one of the best options to save for college expenses tax-free. Like a ROTH IRA or Health Savings Account, any investments inside the ESA will grow tax-free and come out tax-free, but only for qualified education expenses. In this episode, Mark and Mat cover all things Coverdell ESA from the origin and history to the many benefits a Coverdell ESA can provide for your kids and grandkids.

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Mark Kohler: Welcome, everybody, to this week’s episode of the directed IRA podcast, where they’re helping you build your retirement accounts to the maximum value with what you know best, what you know, we’ll get you to your greatest rate of return. My name is Mark Kohler and I’m here with the amazing Mat Sorensen. And before we get started, and I just got to announce Mat Sorensen hosted again the amazing 6th annual two-day summit. I mean, Mat, it was historic. I mean, it’s the

Mat Sorensen: The best one we’ve ever done. We had our special beat reporter out showing us not just talking about self-direct and investments, but showing us actual real estate owned by retirement accounts, actual cows owned by savings accounts. We even got online and looked at some trading accounts, real accounts that own this stuff. So we tried to keep it real for you because it was real.

Mark Kohler: It was not recorded. We got an E rating, which is E for everyone. Just want to point that out. And but no, it was a lot of fun. And if some of you missed it for what is it, $199 would have $199 man C I would have sold out four $299 right there. You blew it.

Mat Sorensen: I know, I know. OK, I care about people too much you know that.

Mark Kohler: You care. You care. You’re a giver you know. Mat Mat Sorensen the giver. But $199 you get almost twelve hours of content on directed IRAs and we did a pre-session just explaining the difference between different accounts. Like all the types of accounts, I said difference twice in the same sentence anyway. The different types of accounts like IRAs, 401ks, SEPs. We did backdoor Roths Backdoor 401ks. We went in the back door everywhere. I mean, it’s amazing. So everybody, please go check out the summit. You can get it at any of our websites and immediately start watching. There’s a great workbook that comes with it. Am I missing anything? Mat.

Mat Sorensen: No, yeah, you can watch it over and over the recordings available for a year, look for it at SDIRASummit.com, SDIRASummit.com. Also, make sure you subscribe to the newsletter. You’ll get updates on it from there and on all of our articles, which you can do at any of our websites. DirectedIRA.com, MainStreetBusiness.com, KKOSLawyers.com, MarkJKohler.com, MatSorensen.com, and all those great websites.

Mark Kohler: Yeah. And as we get into our topic, I’ve got to do something with my hair. I’m like the mad scientist in back to the future. So we’ll do a quick clip here and it’s going to go like my hair is going to be fixed. But Mat Sorensen. When we come back, tell us about our topic today. It’s going to be good.

Mat Sorensen: We are delighted to be with you today, talking about my favorite topic, Self-directed retirement accounts every damn week. That’s what we do.

Mark Kohler: And one of my new favorite topics, maybe not Mat Sorensens is the ESA, the educational savings account.

Mat Sorensen: Nope, that’s not a typo. ESA, that’s OK.

Mark Kohler: We’re going to have to explain where this all originated from and all that here shortly. But don’t go anywhere. This is a big deal. And I’m going to make a major argument that the ESA is far better than the 529 for better. Yeah, that’s a very bold statement because Wall Street would say I’m crazy and yeah I’m really I totally Mat I got I was Mat like my wife like what are you so upset about. I’m like frickin you can’t find any decent ESA that’ll really I’m sorry. 529 plan that will tell you what’s really going on in their plan. Smoke and mirrors baby. Oh so the ESA everybody you’re going to love it.

Mat Sorensen: There’s my ok all right. I like it, well this education savings account it can be self-directed sometimes it’s called the Coverdell IRA but we’re going to break it down. How you can use it. I can get money into it. Why it beats the 529. You know, I was talking to a financial adviser maybe a couple of years ago, and he said when he was trained as a financial adviser when they were picking up new customers and they’re out prospecting, they were told to focus on helping your kids pay for college and 529s before IRAs and for one case for the person themselves, because there is more desire. If you have a kid who’s in elementary school, junior high school, whatever they’re at, that hopefully going to go to college. There’s more like desire for people to put money into those accounts than it is for their own retirement when they hit fifty-nine and a half. So I thought that was very interesting. It’s probably backwards in our minds, but we still think the 529 in the USA is a great tool to help save for college, but maybe not at the expense of putting money into your own IRA or 401k.

Mark Kohler: Yeah, I just. And we’ll just get over a couple of these policy points that Mat and I are a little opinionated about and don’t be offended, we know a few of you parents out there are like my kids are on their own. They can figure it out. And then we’ve got other parents sort of like hell-bent on paying for an Ivy League college education for their kids before their own retirement and everything in between. And I’m not saying one of those is right or wrong. Well, I am I’m going to say,

Mat Sorensen: Oh, you’re a which Mark Kohler showed up today not the one I know.

Mark Kohler: Ok, so, all right. I’m going to say how it is I this is the Suze Orman to me. I’m going to say that there’s nothing wrong with paying for your kid’s education or not paying for your kid’s education. I think that’s very different opinions on families and how to approach that. However, to sacrifice your own future retirement. To just pay for your kid’s education, I think that is that’s ludicrous and we do see people that come in and go, I drain my 401k for my kids college. And I’m like, you got to be kidding me. And I probably am a little brutal on them, but I want to encourage all of you that we’re going to share some strategies with you today where you don’t have to worry about doing that. If paying for your kid’s college is that important to you, pay attention, because we’ve got things that do not require you to sacrifice your 401k

Mat Sorensen: all right, ok I love it. All right, let’s just talk about why don’t you go over let’s do you want to compare it to the 529 first, do you want to just lay out the ESA, the Coverdell.

Mark Kohler: Let’s lay it out and let’s start with the name first. Now, I have an article out on this that just came out this past week. And for those of you that want to print it out and mark it up a little bit, there’s a lot here. So I’m going to recommend that you look at that. It’s in the show description, the link to that article. You can easily just Google ESA and Kohler if you Google just ESA. There’s going to be 19 ads from every Wall Street brokerage in the country trying to get your attention, use Kohler if I may encourage you to do so. But the article is really I start out with the name because it is confusing the current name in the IRS code that is the preferable and accurate term for this type of account is called the Coverdell ESA, or Educational Education Savings Account. It used to be called an educational IRA. It was called a Coverdell. At one point it was covered called a Coverdale IRA at one point, but now it is just covered. You say there only one account. So don’t think, oh, well, what about the education area? What about the the same thing? And the name Coverdale came from a Georgia senator who really championed this account back in 1997 when the Tax Reform Act of 1997 was passed. I forgot his first name, but Senator Coverdell from Senator.

Mat Sorensen: What’s his first name. Senator.

Mark Kohler: That’s the name. That’s the first thing you want to talk about contributions. But what about how to set it up. Let’s just do that. Yeah.

Mat Sorensen: Let’s talk about getting money in now. There are a couple of different parties involved here when you’re setting up the account because you’re setting it up, let’s say, for your child, that’s the most common parent setting up for their child or maybe a grandparent setting up for the child. Let’s let’s walk through this. The most common parent setting up for the child. And then when you’re setting up. Yeah, let’s say that three parties. Ok, all right. So you have the beneficiary. That’s the kid typically. Or grandkid. That’s the person you’re wanting to save for. They need to be under the age of 18. To establish the account for him and that’s the person who’s going to use the money once they get to 18 and they’re going to I mean, they’re not 18, but once they go to college, you know, and they’re going to pay for their college expenses. Now, there’s a person called the responsible party that is the one who’s setting up the account that has the investment decision making authority, and we’re going to get some other things that happen hereafter the child reaches age 18, you want to make sure you’re up to speed on. But that party is the one who is. In charge, basically, that’s the parent typically set it up for the beneficiary who’s the child so responsible individual is the is who you are as a parent, typically setting up the account for your child, who’s the beneficiary? Now, who’s the third party Mark?

Mark Kohler: The guarantor or the depositor? Because the parent, there’s an income. Limit, or if you make too much money, you can’t put this put money into your kid’s account. Heaven forbid middle income or upper class, middle America gets an opportunity to save for the kids college. But hell no, so there’s a way around this. This is a big loophole. This is loophole number one. We’re going to and I’m going to take this to the hoop and slam dunk it on why it’s better than 529. But this is a pretty cool provision because you can get around the income limit, which a lot of 529 advocates complain and go, oh, this is an income limit. There’s an easy way around it so that the responsible individual opens the account but doesn’t put any money in if their income is too high. We let grandparents or even the kid themselves can put the money in and they don’t have to have earned income to do it. It’s not like a Roth IRA. So when you pay your kids so they can open a Roth, that’s great. And we want to do that. In concert with the ESA, Mat can explain why here in a minute on that. But see, there’s a lot of moving parts here. But the point I like the Mat points out is that a parent sets it up, says, hey, grandparents, we got this account set up for little Johnny or little Susie. You can put it up to two grand. And that’s all that can go in per kid. Even if they had 10 accounts, they can only put in two hundred dollars per account. It’s Maxtor two thousand. But then the donor is different than the responsible individual. Sorry, that was a roundabout way to get to it, but.

Mat Sorensen: Yeah, tricky. Yeah. And so you sometimes that’s called the depositor, you know, who’s putting the money in donor guarantor depositor so you can get confused on this. But remember there’s like Pakzad three parties. The beneficiary that’s typically the kid who’s getting this money put aside for their future education. There’s a responsible individual who’s typically the parent setting it up and controlling these funds, deciding what it’s going to invest into, and also deciding if they’re going to send that money out to pay for that kid’s college expenses. And then you got the depositor putting who is the party? Who puts the actual money in. OK, now let’s talk about getting that money in so you can put up to two thousand a year into a Coverdale per child. So you’ve got three kids. You could be put in six grand in total. Two thousand and each one of their covered else. Now, as Mark said, there is an income limit that where if you make a lot of money, you can’t contribute to it. And I think that’s about one hundred ninety thousand joint, maybe one hundred thousand single somewhere around there.

Mark Kohler: Let me give you right out of the mark Jay Kohler calendar. We’ll open that up here and right here on the Coverdale contribution. Phase-Out. It phases out between $95,000 and $110,00 if you’re single and married, finally joint between $190,000 and $220,000, it’s pretty high. I mean, that was a lot of Americans, but.

Mat Sorensen: So if you’re under that, if you’re under one hundred and ninety joint, you’re under ninety five single, you can just throw the money in is the depositor yourself. Easy peasy

Mark Kohler: Now. Mat I want to go to something exciting because I think we got to get everybody sold on how quick but these are OK. So what happens if the kid doesn’t use the money? What can they use it for? When how long can you put in contribution? We’re going to break all that down, but let’s get to something I think that’s pretty sexy. OK, here’s the cool part.

Mat Sorensen: And I’m all right.

Mark Kohler: I’m going to throw it out.

Mat Sorensen: Yeah.

Mark Kohler: When you compare this to a 529, that’s that’s where I’m going with this. A 529 is a government plan sponsored by particular states. Ohio right now has the best 529. Every website I could find, but this

Mat Sorensen: Is where you’re going with sexy?

Mark Kohler: Ok, this is obviously what I think is sexy and what you think you’re sexy. You probably do it for two different things. That’s for.

Mat Sorensen: Ohio’s got the best 529.

Mark Kohler: Now, you know those Ohio Buckeye cheerleader there.

Mark Kohler: Ok. OK, now. Ok, so a 529 is ran by a state. Now most of the states marry themselves to one mutual fund. Vanguard, I think is the one of choice for Ohio. And I’m not kidding. Heaven forbid you could find a distinct summary of what their rate of return averages annualized per year after expenses. After two hours, I gave up, I mean, I would have probably had to order the one and a half-inch book prospectus and dissect it myself, because they’re not going to tell you, because everything I could see was you’re lucky to make 5%, maybe 8%. Now they’re like, oh, since inception we’ve been 19 percent or this or that. And we’re compared the best and all. They throw out all these other numbers, but not the real one of what is my average annual return on a thousand dollars after expenses every year on average, and they’ve got all these other little funny ways of looking at it that makes it look good, but you never get that true answer. OK, so I’m just going to say right now, everybody out there will say, well, you’re going to get lucky if you make 10 percent annually in a 529. And I think it’s half that. OK, here’s what’s cool about the ESA. You can open up a self-directed ESA right now at Directed IRA, multiple other locations, but Directed IRA is only one of the few, if not only a couple in the country where you can set up a Crypto ESA. Now, what’s cool about that, Mat, I did some math, if you would have taken two thousand dollars one year ago on April 1st, 2020 and I put it in Ripple, I just tried to Ethereum. I looked at Bitcoin and Ripple was of in the middle ground. Doge was with the chart, but right now doges very hard to buy insight. We don’t even have an exchange that would allow that. But I put in Ripple two thousand dollars last year, April 1st today to as of today’s date recording it would have been worth. I want to get the exact number here so that you can get excited.

Mat Sorensen: That approximately company, the crypto is called XRP. That ripple has.

Mark Kohler: Yep. And there’s a bunch of coins out there. Some of you are anti cryptocurrency. Just chill out here for a minute. Every cryptocurrency except a few that died, 90% of them have increased in value exponentially over the last ten years as people are figuring these things out. But anyway, I’m not giving investment advice, not telling you to throw all your money in crypto. I’m just saying as an example, because a lot of people say, well, what can you do with two grand? I can’t do anything with two grand bullcrap. One thing, again, if you would, about REPL last year on April 1st, 2020 today it would be worth $180,797 dollars, an approximate 9,039% return. Now, if you want to look at other types of accounts like. Maybe gold, silver, maybe some stocks like GameStop or even Lululemon or some traditional stocks, you can do all that in a two thousand dollar ESA, but you cannot do that in a 529. So why I get excited about this is the cost of colleges off the freakin chart. And I want to try to make as much money as I can with $2,000 and a 529 is a pathetic way to do it. There you go.

Mat Sorensen: Right. Yeah, I think well the 529 is like you’re going to just go slow and steady. There’s, you’ll never hit a home run. You’re never going to score a lot of points on any investment. You can get more money in a 529 each year than two thousand bucks. Granted you could put ten thousand in a 529 but you’re basically going to get incremental growth. You’re basically to use the money you put in to come back out to cover education expenses. So there’s there’s some growth obviously there. But the Coverdell allows you to invest in whatever you want, whether it’s Crypto like Mark mentioned. And sure, it’s easy after the fact to say, well, yeah, if I invest here to there and the most successful, the most successful cryptos, I could have had a huge gain. But some of the companies I’ve seen it with clients. We have a lot of clients that have real estate and the coveredell for their kids. You know, if you think about putting in we’re not just saying two thousand bucks. I mean, if your kid’s 10 years old, they got eight more years, let’s say, until they’re that’s that’s 16 grand of contributions. And so I’ve seen clients get properties under option with a Coverdell, get huge gains back on it when they find the right deal, where they know they can make a fifty thousand dollar hit or something with the low investment.

Mat Sorensen: And that gain goes back in their Coverdell. And then it’s funny because I’ve seen some of these these parents who do send their kids to Ivy League schools, or I’ve seen some of just the, you know, regular state university too. Big checks going out of these ESAs to cover this, and so for those parents, I think they caught the vision of I’m going to help my kid either way, I might as well be strategic about it and do it in a tax preferred way. Because here’s the thing on the coverdell, I think we skipped this. The money that grows, there’s no tax on it, so when I put money in, there’s no deduction, I’m not getting a tax deduction when I put money in a in a Coverdell, nor do you get a tax deduction on 529. But in the Coverdell, it’s growing tax-free if you make some great investments and it’s coming out tax free, when covering the education expenses of your kids.

Mark Kohler: Yeah, I love it, I just think back and I wonder if Rudy Ruediger would have taken that thousand dollars that, you know, he had saved up working at the steel mill before his buddy died at a steel mill. I mean, just think of what that thousand dollars could have done for him.

Mat Sorensen: Is this a movie? I don’t know. Rudy Rouda. What?

Mark Kohler: Yo, dude, you’re really embarrassing yourself. You don’t know the movie Rudy,

Mat Sorensen: Rudy, like like like Notre Dame.

Mark Kohler: That’s Rudy Ruediger, the real guy of a thousand dollars before he left town. And his dad said, you’re an idiot. You’re Ruediger. Nothing wrong with that, but don’t go. He had a thousand dollars. He could have put that in an ESA, which is an important point. You again, if you have too high of income, you can gift your kids money and they can put the money on the ESA themselves. All right. All kidding aside, now, let’s see. We’ve talked about the main parties. Yep.

Mat Sorensen: Ok, let’s talk high-income people, though, that that that can’t put the money in themselves.

Mark Kohler: All right. OK. Now, I already kind of alluded to this, I’ll summarize again, if you find yourself in that predicament where you’re making too much, just open the frickin account and then do a gofundme. And say, I don’t know how a high income individual could pull off a go fund me for my kids college, but now anybody can fund it. Under that income level, so grandma, grandpa, I had a client just this spring within the last two months, they opened the account and they had the grandma put the money in and then they created an LLC, of which there was Roth accounts as well, including the coverdells. And they bought a piece of land that will be developed into an RV park and they got a piece of land that is just dry and dusty and ugly. And this thing is perfect. It’s going to make a ton of money. Yeah, I mean, Uncle Eddie would just pull right up and pay those RV park fees. But this is going to be. But it is it’s going to be a phenomenal investment. This guy is knows exactly what he’s doing. And a lot of times that’s the trick. You can take this ESA Money and Mat said option some property, tie up some property with a down payment that, you know, has a future value that no one else sees. And then and couple that money with other Roth accounts or whatever in an LLC and really put this money to work now. On that note, you can’t put in more than two thousand dollars per year up until the kid turns 18. So in the year they turn 18, make sure you put the money in before their birthday. It’s not before the year they turn 18 before their birthday. But then you can keep investing it so you can make these deposits up until age 18 or the grandma can or the aunt or uncle or the kid themselves after you open it because you want to be the designated responsible individual and then grow it and they have till age 30 and Mat. What are the expenses they can use it on? There’s all sorts of goodies.

Mat Sorensen: Yeah, I mean, obviously tuition and fees, books, room and board, even so, those are all qualifying expenses for the coveredell. And now there’s actually certain private high school qualifying expenses too. If you’re want to. You’re in that scenario with come out for that. But for the most part, it’s for obviously higher education, college tuition, fees, books, room and board.

Mark Kohler: Yeah. And what’s cool is the essay can be used for private school, elementary education or pre college private education where the 529 cannot. So the ESA opens a doors.

Mat Sorensen: I think the 529 can too now. Now I think that changed the 529 can

Mark Kohler: Under the new. Yeah, that’s right. If that was under the Trump’s administration’s little passage. Yep, yep. OK, now if they don’t. Ok, but also Mat, I see computers, laptops, books, tutoring and even transportation. To get to and from school. There is a case on that one, but that’s a whole other story. But you there there’s lots of options. Heck, if you’re looking for ways to earn money for your ESA, you’re in a good situation.

Mat Sorensen: If tuition is not enough and you still need to burn someone out of their life. Good. You’ve done, you’ve done. You figured your crap out in life. OK, well, what happens though, Mark, when what happens to that kid doesn’t go to college?

Mark Kohler: Ok, this has been the big research that I’ve been working on the last two weeks working on this article, and that is the kid not using the money. So you’ve saved up. Maybe you got lucky. You hit big on some option on real estate or Crypto or some currency or whatever, and you’ve got one hundred grand that you saved up for this kid.

Mat Sorensen: And let me say this too. I mean, I don’t want to think people think you only got to have the home runs. You know what if I just put I mean, I put two grand in for ten years, you know, 20 grand and I had a five percent return on that. I might have 30 grand in here. You know,

Mark Kohler: I might be able to pay for books.

Mat Sorensen: I’m just the big amount of money, though. I mean, I’ve.

Mark Kohler: Yeah, that’s lucky. You know, his kids are geniuses that got scholarships, have got all these cool things. I love my kids, but there’s other kids out there that you’re looking at, 30 grand a semester and a lot of these top tier schools. And it’s insane to the point you want me, Lori Loughlin and, you know, to get a deal. But OK. So anyway, I think, too, we’re going to come to the Roth IRA because I want you to do the Roth IRA in conjunction with the Coverdell, and we’ll explain why in a moment. But. Here’s what happens if they don’t use the money. They have until age 30 and you as the responsible individual, first, you need to make an election when the kids about ready to turn 18, you’re like, I’m still in charge. You’ve got to let you go because you don’t want your kid to be in charge of their own money. They’ll drain it and they don’t care. So you want to make sure that you’re the responsible individual after age 18 for the child, and that gives you the right to roll it over to any family member of the child. So it could be a grandchild. So say they have kids in their mid 20s. You can immediately change it to a kid under a grandchild, a child of your child, and they’re under age 18. And you can start putting in two grand again per year. You can more sister.

Mat Sorensen: Yeah, younger sibling. That’s under 18.

Mark Kohler: And I know this sounds weird, but you can even roll it over to a spouse. So let’s say your kid doesn’t want to go to college, but they get married and their spouse does. And it could be male or female, whatever. You can think of all sorts of hypotheticals. And they’re saying we’re going to go on to medical school or my wife is or my husband is. And they’re like, OK, I’m going to change the beneficiary to the spouse of the child to help pay for those higher education costs up until age 30. And then you can change it again. So, I mean, this just lives on and rolls over.

Mat Sorensen: Cousins, too, which could be nieces and nephews to you. So, yeah, they try to give a lot of flexibility to this that if the kid didn’t use it, let’s try and keep it in the family and and let that those funds come out. No tax, because that’s that’s the point. The Coverdell to pay for somebodies is for education

Mark Kohler: Because Elwood’s her dad had no idea she was going to go to law school and she’s like, I’m going to go. And she got into Harvard and it was probably her admission video that just did the work. So now, if any of you have not seen the the documentary of Elwood’s, you need to go see that Legally Blonde. It’s it’s as good as Paperchase in the 1970s. It’s a good one. OK, now. All right. Trying to make sure all of you can do your own research.

Mat Sorensen: Good old Reese Witherspoon. That was a great character. A great character I.

Mark Kohler: I object

Mark Kohler: Legal jargon in everyday terms and situations, I object. It happens to me all the time because if I get cat calls on the street, I’m like, I object. It’s really it’s annoying. Yeah. So, OK, now what was our OK, Mat tell us why. We would do a Roth for the child at the same time we do the ESA.

Mat Sorensen: All right. Yeah, this is not an either or you could double up on this, you know, kind of like the belt and suspenders, you know. You know, I’m talking about Nalgae Belt suspenders, John generally, from a fashion standpoint, I’m against wearing a belt, a belt and suspenders. To me, it’s either one or the other. But you really need to keep your pants up. You know, you really want to make sure. All right. So the Roth IRA. Now, the cool thing about the Roth IRA is you can put six grand a year in for your kid. And we’re going to talk about they have to have earned income. That’s a distinction. Let me just say that actually that six grand you’re putting the Roth IRA, the kid has to have earned income in the Coverdell scenario. There’s no earned income requirement. So you can put the money in whether you have an income or not. Grandparents can kid can doesn’t matter. They just got to be under the income limits. Whoever puts the money in and is depositer in a Roth IRA, though, the kid owns the account. See, in the Coverdell, you’re the responsible individual. And like Mark said, once they hit age 18, you can still control the account if you’ve opted in for that. Now, in our account forms, you can opt into that on coveredells with us. Make sure you’re checking that box. It’s in there to say I want to be in control even when my kid hits age 18. So you’re controlling that kid doesn’t go to college again. You can transfer it to one of your other younger kids or all the parties Mark and I talked about. The Roth IRA, on the other hand, is the kid’s account when they hit eighteen or twenty-one in some states, whatever the age of majority is in the states because this is an account in their name. So but the cool thing is I can put six grand a year in and all the contributions you put in a Roth IRA come out tax-free. So even if I put in $6,000 in a year, by the time my kids ready for college, there’s 50 grand in there and let’s say 30 of that’s contributions, 20 of it is investment gains. You can pull out thirty to cover the education expenses crap. You could pull it out to deliver the heck you want, but it’s a great savings tool because if you don’t use it for that, the kid can keep it and they can keep investing it and maybe they pull it out later to start a business or buy a home or hopefully they do it for something smart like that. And so it’s a great savings tool. In addition to the Coverdell, remember the Roth IRA? It’s not one or the other.

Mark Kohler: I love it. Now, Mat gave you the protein shake version. I’m going to state it another way and then give you the steroid version. And you see all those guys at the gym, you’re like that guy girl. They’re drinking protein. They look good. Then you see that one, you’re like. That’s wrong. That’s steroids, and let’s don’t you look weird. So, OK, but here’s the protein version that Mat just said. Remember Mat example earlier that, hey, throw two grand in the ESA a year and he’d said eight years. And so you might have 16 grand when the kids turn 18 and you’re still investing it, huh? Now you throw the Coverdell in there six times eight. OK, I’m going to add two to that. So it’s eight times eight now. I’ve got sixty four grand. All right. Now we’re outside of the community college level, so I’ve got sixty four grand I can play with. And and and that’s great. Now here’s. I want to address that before we go to steroids, here is. With a 529, you have no choice at all, you have to put it in whatever the state of Ohio chose for you at Vanguard, that’s it. There’s one frickin mutual fund. What’s cool if you don’t want to buy Crypto, fine. If you don’t want to do real estate, fine. We have an investment account option, at Directed IRA, where you can just buy ETFs. You can say I’m going to buy an ETF that has lower fees, maybe a no load mutual fund. I get to choose the mutual fund. I want to do biotech. I want to do it environmental or energy or whatever. And you get to choose, which is already better than a 529. And now you’re getting maybe a snowball effect on not just the two, not just the six, but the eight. So you’re getting investment choices in the stock market. And you’re doubling down. Now, here’s the steroids. IRA/LLC. I got a pen, I got a drop of something, just dropped my cell phone. Oh dang, I broke the screen. Yeah, well, Apple came out with some new announcements this week, so maybe I’ll, you know, I’ll go get a new phone. OK, but here’s the thing Mat I could form an LLC with my two kids coveredell’s and my two kids, Roths. Now I got an LLC capitalized with 16 grand on day one, and next year I can do pro rata contributions again. I can do 16, I can do 16, 16. Now I’ve got an LLC where I can really do some damage. I mean, do some good things.

Mat Sorensen: I love it. Very true. Yeah. I mean, and for those of you with multiple kids, you know, you can add them into the same LLC like that and or even just the you know, you got one kid, you got the Roth and Coverdell going. I like that. It’s maybe easier once you get a few years of contributions in to find the right real estate investment. And in the meantime, you could be, like Mark said, just doing stocks, bonds and mutual funds. I mean, directed. You can do that. You can if you want. We have clients that are in between Self-directed investments all the time that want to just buy an index fund or they want to buy Apple or whatever, you know, Tesla, whatever stocks of interest to them. GameStop Mark likes to always throw that out there. I don’t know anyone that there’s a fear, very few people who made money on that. But you could have you could have been one of the lucky that actually made money on that one.

Mark Kohler: All of our interns came in. I made another thousand were like, what the hell are you buying? GameStop, let’s not you know. But it was in the.

Mat Sorensen: Now, so you could buy I’m just saying you could buy whatever you want, so but now that’s, you know, and you could there’s like Mark said, the 529 is your other option. And that’s you have no choice. You’re just you’re in whatever the state fund is. And so that’s that’s the big distinction on the Coverdell. OK, so

Mark Kohler: Mat I want to digress and ask a quick question, we’ve never done a show on this and so we ought to do it. But where’s the line on a collectible? Let’s say you take the 16 grand and you go buy a Porsche 911, one of those 1980 versions that are really skyrocketing in value right now. Is a vehicle, a collectible? Let’s say you’re going to you’re not going to tinker with it yourself, maybe you drop it off at the shop and they put in a new stereo. They detail it and you just sit on it. Where’s the line on collectibles? I don’t know the answer. I wanted to ask you today.

Mat Sorensen: I think that’s a collectible, I wouldn’t I wouldn’t touch it, I mean, I love Porsche, Porsche 911. That’s my favorite car. So but I think the buying that late model of a car is the value of it is collectible. I mean, that’s. They have collectible value. That’s part of the point of it, like no one buys a 1980 geometro, you know, or, you know, they have those back then. Maybe that was the 90s. You know, no one’s buying in 1980, whatever. Chevy Cavalier. Right.

Mark Kohler: Well is it a rehab. When does it become a rehab. Like say I buy a two thousand f150 and fix it up and sell it. OK, fine. That’s not a collectible. Is it the age, is it now, I guess if you held it, that would probably be it, if I bought the Porsche 911 and fixed it up and sold it? I didn’t buy it to collect it. Maybe that’s part of it. You know, I don’t know.

Mat Sorensen: I don’t know. Yeah, thanks for asking the question I don’t know, but I would be shocked if you could buy a 1980. I mean, that is 40 years ago, so I’d be shocked if you could buy that and sell it for profit and then not be doing things like this pretty.

Mark Kohler: It seems like yesterday, yeah, we should do a show on collectibles, huh?

Mat Sorensen: We could I mean, I don’t know why get people we had to ask about buying a Michael Jordan, rookie card, you know, and clients asking about NFTs recently and stuff, you know, those are all those are all gray areas. And these are areas the IRS is not commenting on. In light of all the crap they got to deal with right now, they are not going to give you guidance on this. So and I’m of the opinion, though. All those things I mentioned are collectibles, some NFTs, maybe not, but most of them, like all the digital art, NFTs, I think those are collectible items. There art essentially

Mark Kohler: Explain what an NFT is.

Mat Sorensen: Non-fungible token, it’s basically a. I mean, in the digital art world, we saw the Beeple, guy that sold the the digital art NFT for 60 million dollars. So that’s that’s art. So we found a different definition of collectible. So but keep in mind, for those of know self-directed assets, you probably do if you’re listening to this podcast is real estate, Crypto, private companies, private funds. I mean, these are all the common self-directed assets. People are investing into private lending. You know, those are certain things your retirement account can do. Collectibles does have a restriction, but there is caveats for that, for gold, silver, platinum and palladium that has certain finance requirements or certain approved coins. Those are things that the IRS has said. No, gold is not a collectible.

Mark Kohler: So I’ve always wanted to buy palladium. So I’m glad you brought that up, I guess. You know what Mat everybody you got to know Mat is going to scold me after he’s like, we’re talking about ESAs. Why are you bringing up collectibles. But here’s the thing that’s exciting about the show everybody, you get to be creative. That’s what’s cool about Self-directing. If you think of something and your like maybe I could buy that and I know it’ll grow in value it. Would that be a collectible? Could I do that in my kids ESA? We welcome those questions. We would love that question. Schedule a half-hour with one of our tax attorneys and say, dig in on this. I think I got a great opportunity here. I had a client with an ESA who here’s an example. I had a client with the Coverdell. This is about eight years ago. Create an LLC. You’ll remember this one, because it was kind of a mess. And I’ll tell you why it was a mess later. But we set up a Coverdell, created an LLC and they bought they lived in Hollywood and they were stuntmen like the husband or wife. That was their career. They loved it. They were met each other on the set and they travel around and be stuntmen on different movies. And they were a good combo because if they needed a female or male, they’d get a twofer, you know, they’d show up and do their thing. Well, they bought they figured out real quick that a lot of these production companies, they never owned anything. They would rent everything. All the lights, the sets, the gaffing equipment, all the stuff would show up in a truck and same for stunt gear, like, say you’re going to blow something up or you’re going to put someone on fire. So they built a truck with all the seriously, I was so interested in this at the time. And like when a production company says we need, you know, it’s Mission Impossible nine and we’re going to need X stunts, there’s X gear they will put in the budget, we’re going to need this equipment to do it. I remember them demonstrating how that knife came down on Tom Cruise’s eye and that one where it touched his eye. And they there was a documentary on how they did that stunt. And it was a real knife and really his eye. And they had built this situation where they could come down full force and the knife would stop at the exact spot every time. And Tom Cruise said, I’ll do it because he’s known for doing his own stunts. And he sat there and his eye was that close in the movie. That was his real eye and that knife wound anyway. So they built a trailer of equipment and would rent to studios. They did that with their kids, Coverdell. They were making like forty fifty percent because the studios, they paid millions for all these movies. And so they had bought that equipment and were renting it and making great money. And they’re coveredell LLC until one day. And Mat remember this, you may not remember there’s a little four letter word that came on to play UBIT. You know that. And you said, Mark, they’ve got UBIT. And so we had to convert the LLC to a C Corp, which is cool. And so they ended up having to pay a twenty percent or so tax rate on the income. But what I’m saying is everybody and this is what I think is exciting about the show, is if you know a way to make money. There’s your ESA maybe there’s a way to

Mat Sorensen: Yeah, yeah, Renting stuntman equipment who would have thought, well, hey, all right, now people do some cool stuff, love that.

Mark Kohler: I’d like to be a stuntman because I want to be a stunt double

Mat Sorensen: Like stunt double. What’s the difference between a stunt double and a stunt man?

Mark Kohler: I don’t know the subject, but

Mat Sorensen: I think that is the same thing, I’m guessing it’s the same thing.

Mark Kohler: Yeah, I think you’re going to double for the see, I bet you the differences. You look like the actor.

Mat Sorensen: Yeah, there’s definitely the I’ve seen those all there’s a lot of big actors, all kind of have like their typical stuntmen, that kind of does look like them. So I’ve been

Mark Kohler: To be a stunt double for the love scenes because, you know, I have that look.

Mat Sorensen: Yeah you have that look and that skill too you know.

Mark Kohler: Yeah. I mean, I’m going to

Mat Sorensen: Get a guy that can ride motorcycles over, you know, flaming cars. You know, you guys, there’s always a guy for the love scene. OK, well, all right. So let me just kind of wrap this up and conclude. Remember the Coverdell education savings account sometimes called the Coverdell IRA Coverdell ESA, you can put two grand a year in it per kid. All right. And make sure you’re watching out for the income limits. About one hundred thousand single, two hundred thousand married. But remember, there’s easy work arounds to get the money in. We at Directed IRA to have a depositor form, so we’re not looking at who owns it. We just want you to say who’s the depositor? I mean, you’re going to indicate who the responsible individuals and who the beneficiaries. But in terms of the contribution qualifying, it goes on who’s depositing the money in and actually don’t businesses have no income limits so businesses can contribute to coverdell’s too.

Mark Kohler: And trust irrevocable trusts and things. And I want to make a challenge to everybody. I know part of the show is making it interesting and fun. And I appreciate everybody’s patience with me today. I’ve been the color commentary, apparently, but I want to just make a challenge to everybody. May 17th. We are just two to three weeks away from the deadline for 2020, you can make a contribution up until April 15th for the prior year. Oh, but we got covid year. So we now have until May 17th. Open a Coverdell throw two grand in. What’s it going to hurt? Get it in there. You can choose the what’s the option Mat where they can buy it. You forgot the term the to buy stocks, bonds, mutual funds,

Mat Sorensen: The brokerage option it’s 80 bucks to add and then it’s 35 bucks per trade. So just keep that in mind again when you’re done with that and you’re ready to self-direct your easy move right back over to self-direct.

Mark Kohler: Yeah, you could do the crypto Coverdell, you could do the brokerage option. Coverdale, take the two grants. Hey I’m going to put it a thousand and see I we we are not a registered investment advisors. We are not giving investment advice. These are examples. You just now put a thousand an apple and a thousand and Tesla and just let it sit, you know, see where it goes in bitcoin. There’s a lot of predictions. Bitcoin could be up to four hundred thousand dollars by the end of next year, who knows. But it’s down this week. So you take a thousand dollars or two thousand and you buy Bitcoin. I don’t care. I’m not telling anybody to buy anything specific. But get the get the get the two thousand in and you can put it into two thousand for this year at the same time. So now you’ve got you’ve got four grand per kid. Then you can say, holy crap, I got three at four grand apiece, I got twelve grand to play with. Maybe I’ll open an LLC and start a crypto mine or I’ll go buy cows or I’ll go buy a F150 and get it detailed and resell it or I’ll get you know, who knows. You can do all sorts of things is you start thinking outside of the box and that’s why I was trying to be a little nutty today. And funny is just to try to get people going. Oh yeah, I can think like that.

Mat Sorensen: All right. And like we said too, don’t forget about the Roth IRA, Roth IRA. It could be for kids to the one caveat there, make sure they have earned income. If you’ve got a family business already, awesome tax strategy to pay your kids anyways. And what better way to pay them than to put it in their Roth IRA?

Mark Kohler: We need to come out too. Yeah, you make

Mat Sorensen: Six grand for 2020 six grand for 2021. Twelve thousand bucks.

Mark Kohler: And let me give you one last tip and then we’ll all look I take it about is. I had a client two weeks ago that said, yeah, I didn’t get around to paying my kid, I have a small business, I love what you guys teach, but I never actually paid them. And if you don’t have a paper trail, you can’t say you paid your kid. We want that’s got to be honest. And the kid has to help with the business. And the guy said, get my daughter help with the business. She’s 16 years old. I just never went through the process of paying her. I said. Does she have another job? No, she just babysat all year, whoa. How much did she make every month, baby? Oh, she make a couple hundred bucks a month, that’s twenty four hundred dollars. She has earned income. He’s like, oh, my gosh, I never thought of that. And I go, dude open up a Roth drop in twenty four hundred dollars for last year. Oh, my gosh. Right. So don’t think your kid has to have to or has to have a 1099 or has to have this payment from you. Get out there and just think creatively. Where did they earn their money this year? So.

Mat Sorensen: All right. Well, thanks, everybody, for tuning in. Like I said, Mark’s going to have his article out, so be on the lookout for that. You can sign up for our newsletter if you want to get notified and see the article in your email inbox. Just the lazy, easy way. Just make sure your sign up for our newsletter, which you can do at Directedira.com/podcast. And we will make sure you’re getting those updates. Of course, if you are on, that’s going can also be on your blog Mark. You can also go to MarkjKohler.com I’m sure

Mark Kohler: Will feed through the chaos that will feed through the law firm site.

Mat Sorensen: And we’ll add it over onto Directed IRA as well, because we’ll put it out on the Coverdell page.

Mark Kohler: All right. All right. Thanks, everybody. Mat, you’re awesome. So smart and putting up with my antics.

Mat Sorensen: Yeah. I mean, I was I was. Some of those didn’t hit for me, Rudy. I mean, I didn’t I didn’t I don’t know Rudy’s last name. I just know Rudy, you know. But the Elwood’s one that one. I needed that one today. So that’s the time that I’ve watched that so many times. Great, great flick. OK, thanks, everybody. We will see you back next week. And if oh I do, I forgot to say it. Self Directed IRA Summit. If you missed it, don’t worry. Recording’s going to be up in the next few days you’ll be able to get it at SDIRASummit.com SDIRASummit.com it was an awesome two days of jam-packed information on how to self-direct and take control of your retirement. Well worth the time. The money is easy. It’s the time you got to put into took to watching it. I think we really I think I felt like we delivered. So you be the judge if you don’t feel that way or send your money back.


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