EP 69: Student Loan Debt Crisis and The Solution – Coverdell ESAs, 529 and Roth IRAs

Show Transcript

Mark

About something totally non controversial. And that’s all of you that are excited about student debt and want to help everybody get out of debt.

Mat

And you’re like, whoa, student loan forgiveness is happening. The Biden administration.

Mat

Yeah.

Mark

I’m getting more upset the longer you talk, so shut up. Okay. Is this even going to help the economy as many feel it’s going to hurt inflation? Welcome, everybody to this week’s episode of the Director Diary podcast with yours truly, Mark Kohler, my amazing co host, Matt Sorensen. We thought this week, you know, let’s just talk about something that’s really not controversial at all.

Mat

Yeah, everyone agrees on this.

Mark

Yeah, it’s great. I mean, everybody is excited about student debt. They think it’s not a problem at all. Yeah, we thought, you know, maybe we should talk about the Ukraine, Russia, Israeli peace talks, world hunger.

Mat

So we don’t Yeah we don’t do.

Mark

Yeah we don’t do controversial so we’re going to talk about something totally non controversial and that’s all of you that are excited about student debt and want to help everybody get out of.

Mat

Debt. Yeah was that.

Mark

Passive aggressive with that is that let’s.

Mat

Call it passive aggressive.

Mat

Yeah So we know there’s some politics here and generally like to avoid those politics here because you know, we like to beat up both political parties here on the Diary podcast, but we’re going to talk about the format Format. Yes. Okay. So I want to give a little context here. Today’s episode is going to have some rant here at the opening, but we’re going to get to some statistics that are super important to understand and we’re going to go to tools and strategies. There are accounts and ways you can save effectively, affordably in a tax efficient way for college. And we’re going to get to those. We want to make sure you know all of those tools.

  

START OF TRANSCRIPT

Mark

Yep, love it. And I know a lot of people sending questions for the show on Open Forum. How do I get out of student debt if I’m in that crisis? Well, is it tax deductible or not? What can I do? We’ll mention a few things there as well. Let’s just see what we can cover here. But it’s but so don’t turn away during this rant portion. Now, before I rant, maybe you want to give some context.

Mat

Like maybe some people have been living.

Mark

In the Amazon for the last month, you know? I don’t know.

Mat

Yeah.

Mat

So you came out and you’re like, whoa, student loan forgiveness is happening. The Biden administration.

Mat

Yeah. Okay.

Mat

So now let me say this. For those of you that can get this great. Go get it. It’s free money from the government. Bless you. Go grab it.

Mark

Is he really doing it? Is it all approved?

Mat

It’s happening. It is happening. Oh, all right.

Mark

That’s food for my fodder.

Mat

You can rant here in a moment.

Mark

Okay. Okay. Hold him back.

Mat

Hold him back. Give the what’s happening just in case you don’t know so you can get student loan forgiveness up to 10,000 of federal student loans. Now, if you got a Pell Grant, which is 60% of student loan borrowers, you get an extra ten grand for a total of 20,000.

Mark

Sunnova.

Mat

If you’re a married couple that both took loans that had Pell Grants, you’re getting 40 grand of student loan forgiveness here. All right. Now, this is income based. They didn’t want high income earners to get this cool, whatever. It’s the politics of it. So if you make 125 grand or more single, you don’t get this 250 more married. You don’t get this. All right. So so it’s limited to those that meet the income requirements and have the student loans. Now, if you got 100,000 or more in student loans, you’re only going to get 20,000 max if you had the Pell Grant forgiven. So that’s what’s happening right now. It’s going to be automatic for a lot of borrowers, actually, that are going to get this. The Education Department’s coming out with a form where you will apply for it if you’re not going to be that automatic person who gets it. So there’s going to be a process for this. Also, student loan payments have been extended again, you know, so you don’t have to pay your student loan payments again. So that’s what.

Mark

Happened. I’m getting more upset the longer you talk. So shut up. Okay. Damn it. All right, all right.

Mat

Now, it’s this. This is the ramp.

Mark

Okay? I just want to create. An opportunity for some of you to express those feelings that you have deep down inside that frustrate you when you hear what Matt said. Some you may disagree with my rant on some of my rant, but let me just say a few things that most of the people I’ve talked to, I just want to say all of them have got a problem with at some level. Number one, I’m just going to give some of the issues that I think some people may again, may not agree with some of these rants and I’m sure metal out a few here and tone it down where I stick my foot in my mouth. But number one, really, is this even going to help the economy as many feel it’s going to hurt inflation? This is a publicity stunt. When Biden’s got the lowest approval rating of a president and how many years and can we just throw something out there to help people like him? Ridiculous political ploy. Number two, I know some of you are struggling under student debt, but it’s your debt. You went into it. You know what? We have to live by your consequences in our life. I’ve done it. I’ve done a debt snowball in my life. As an attorney. I had to do a debt snowball to get out of some debt. You know what? We have to own what we’ve created. And sometimes it sucks. And I’m sorry, but me turning to the government for a handout.

Mark

And then third, I’m going to help pay for this. I just got out of my own damn debt and now I got to pay off yours with by paying more in taxes. And then we’ve got. Oh, but it’s only for the poor, not the super rich. The ones that have the most debt are the ones that aren’t making more than 250, 125 but can’t help them. And it’s suffocating them just as much. It’s all perspective. Oh boy, I don’t know where to go. I just say it’s just it’s just wrong. And now, if student debt out of control. Absolutely. Do we need to rein in the cost of college? I my kids, every one of my kids graduated without student debt because I said I ain’t paying for it. You want to go to college? Here’s let me tell you what it looks like. It’s not going to be pretty. So you’re going to go to community college or you’re going to go to junior college and then you’re going to transfer into the larger colleges after you’ve got a small business and some income along the way. And we’re going to graduate debt free. And they’ve done it because we don’t need to go into debt if we approach college properly. But no, let’s go sign up for a top ten, whatever, college and go as a freshman in a class of 500 and pay out the button tuition and just.

Mat

Think that’s a great experience.

Mark

Oh my hell. So many issues here. I’m just. Should I just.

Mat

Leave? Is the rant.

Mark

Done? Okay. Ramstein. All right. Now we’re going to give you some stats on this. You want to tone down the rant read.

Mat

I just I have a little different perspective on this, but here’s my rant on this. What about all the people that went to school and paid off their student loans? What about all the people that worked through college? And it took them eight years to get their degree because they had two jobs to get through and they Sorensen are you going to give them back those extra four years they put in going to school and working? What about all the people that didn’t go to college because they didn’t want they worried about the cost. They didn’t go at all. They don’t have a degree. They don’t have student loan debt forgiveness to to get. So what about all them? Where’s there 20,000?

Mark

All right. Well, if some of you felt that we ranted for you and on behalf of you, job done.

Mat

Yeah, Mark, mark my words. Even though for those of you that get it, I love you. Go get your student loan forgiveness. I’m not saying that. Bless you, but I guarantee you this will backfire on Biden because there’s more people that are not going to get this than are. And they all made these trades. You know what else? Who’s getting screwed on this? The parents. The parents that raided their retirement account to pay for their kid’s college. The parents took a home equity loan out of their home to pay for their kid’s college. The parents who work longer and delayed retirement to pay for their kid’s college.

Mark

Hold the topic. They did it, but they’re not getting a benefit here, too.

Mat

They’re not getting the $20,000 forgiveness check.

Mark

All right. So let’s get some stats out there now. No more rants. It’s out there. So obviously a difficult topic. I’m just my blood’s boiling. Okay. I’m going to give a couple of stats. You know what, man? I’m going to give the I’ll give the crazy stats.

Mat

Okay.

Mark

I’m kind of the crazy rant guy today.

Mat

Feel a little bit. Okay. You want to stay in character? What their drinks are like, drink or go. Okay.

Mark

But you want to give kind of the main line stats.

Mat

Okay. Okay. That’s my character. You keep being the boring character. All right. Okay. All right.

Mark

Okay, I’ll be ready.

Mat

I’m ready. Okay. I got some stats. Okay. All right. You’re going to give your crazy stats. Is that what we’re waiting for? You know, after your first.

Mark

Yeah, your first. Okay.

Mat

All right, here’s some stats. This is really important. The total student loan debt out there right now. This is kind of a crazy stat, too, but it’s reality. 1.7 trillion in student loan debt. That’s trillion. That’s more than evil industries made in a decade. Wow. $1 trillion now. 1.75 trillion. The average amount owed per borrower is about 30 grand. So average student loan debt of those who have student loan debt, $30,000.

Mark

What was the 60 and older quote, too? I like that.

Mat

One. This one is surprising. Those 62 and older. There are 2.4 million borrowers that still have student loan debt. They’re 62 and older. They’re going to get Medicare in three years and they still got student loan debt. You know what? I remember Obama when he was president, he paid off his student loans while president of the United States.

Mark

Oh, my gosh. That’s right. I remember he.

Mat

Has student loan debt as president of the United States.

Mark

Okay. Now, if that doesn’t run, this.

Mat

Crisis touches a lot.

Mark

People now point out, I just want to point out 30,000 average student debt. As you can many imagine, some people have 1000. You’re like, okay, cool. God bless you. That was very careful of you. Those of you that lived like like a rock star in college on student debt are now paying for it. But here’s five instances of and this is all backed by you can Google this get the links to Wall Street Journal on all these these are legit. They’re out there. I’m just going to go five quick crazy ones. The veterinarian who owes $517,000 in student debt, the couple who went to law school, both of them 160 plus 170, there are almost 350,000 in debt together, both working two, two jobs and with their law degrees. It’s now down to $320,000 in debt. This is one hole. Buckle up. The orthodontist who owes $1,060,945.42 as of May this year. Wow. Out of the Wall Street Journal orthodontist making 255 grand a year. Some you’d be like, that guy makes 250 grand a year to get out. He’s he’s going more in debt with the minimum payment on his student loan debt. He’d almost have to pay 30,000 a month. Yeah, just.

Mat

Let me just say this. The student loan interest deduction phases out for high income earners at that income. He doesn’t feel like he’s high income trust with $1,000,000 in student loan debt. He does not feel like he’s high income, but he’s not getting the student loan interest deduction because he’s high income.

Mark

The couple working to pay down 500,000 of student debt. And the number five, the law school graduate who lives on welfare. And he went to Southwestern Law School after a four year degree, had 300,000 in federal loans. Sure he enjoyed law school. Yeah.

Mat

Now, you know, that’s what they say. If if you live like a lawyer while you’re a law student, you’ll live like a law student when you’re a lawyer.

Mark

Yeah, and we heard that in law school. And here’s the sad part. Couldn’t pass the bar. See. I mean, think about the gamble you’re taking going in that seat. If you can’t pass the bar, you’re not even going to be a lawyer After all, that can’t pass the bar. Talks about applying for job after job. He’s overqualified to too many jobs. Can’t get the job because he can’t pass the bar. He’s now on welfare.

Mat

Wow. I mean, it’s sad.

Mark

So those are the stats. Okay. Now, let’s go into some practical strategies. You know what? Before we. We’d love the combo of the 529, the Coverdell and the Roth. We’ve debated for years which ones better. And you know what we’ve resolved? We really came to this year with our team of lawyers and a big fight. It was. It was knockdown, drag out. I mean, there was fisticuffs.

Mat

Yeah. Name calling.

Mark

It was ugly. So we decided as a law firm that neither one of them has all the answers. Again, let me repeat. 529 Coverdell, which is like a college IRA and the Roth, they all have their own benefits. And a combination of those is the key. Now, we’re going to come to those tools here in a moment. But I just want to say, for those of you out there that have student debt, can we say a couple of things, like just some things you could do? Yeah, go for it. Okay. First of all, as Matt.

Mat

Alluded to tips here, but you keep rolling on this.

Mark

Well, no, I want your tips to I’ll just say this. First of all, student debt is not a write off. The interest on your student debt can be a write off if you’re in the right income bracket.

Mat

But frankly, you went to school to get a degree so that you can be high income. So you’re not going to get the student loan interest deduction at least after you’ve been in the workforce for maybe five, ten years. So then you’re paying off that loan over a 30 year term. So don’t count on the student loan interest deductions, basically what I’m saying.

Mark

Yeah. So a lot of people call up and go, how do I get a write off for my student debt? I’m just I’m bad news. I’m just getting it out there. There’s no damn write off. So what? We’ve helped a lot. I’m going to give two tips here. What we have helped a lot of clients do is build a business and the profit from that business is first focused on paying off debt, not increasing their lifestyle, not building for retirement. Let’s build some sort of side hustle, some sort of side gig, some type of operation, maybe even a rental property operation. And you go in with the mindset, I’m going to dedicate that side hustle to my debt. And when you go into that mindset, it can make the experience very rewarding because you know why? I’m going to start a business and then you’ve got this debt over here that’s still looming. Go in with the mindset, I’m going to start this business to tackle the debt first and foremost. Then after the debt is over, I can enjoy the fruits of my business that I built. Third point the debt snowball. Got to give Dave Ramsey kudos. Give him props for being the leader over the last ten years of getting the debt snowball concept out there. It’s been around. You didn’t invent it, but the debt snowball is a method of getting your student debt, credit card debt, whatever the debt is, and putting it in a structure where you don’t even look at the minimum payment, you look at your student debt and a whole new light and the debt snowball can give you a goal of paying it down in a more creative way. So you want to learn about that too. So there’s just three tips I want to or topics.

Mat

One of the tips I want to talk about is it’s okay, let’s say you want to get a student loan. How much? What’s the reasonable amount to get?

Mark

I think you’re going.

Mat

Here and I think the best tip for those and I think as a parent looking at for your kids or maybe you’re thinking about it for yourself, you’re going back to school or you’re in that age. I mean, bless you if you’re 17 and watching our channel right now, think of what your first year salary is going to be upon graduation. If your first year salary is going to be 40 grand when you get out of college, you should not have student loan debt more than 40 grand. I think it’s a good rule of thumb to think of, Well, I’m going to be a doctor. Okay. That’s okay. To get 150,000 of student loan debt, it’s going to take you eight years. You might need that much if you’re like, I’m going to be a schoolteacher. Don’t go get $150,000 of student loan debt and go to USC. The school is not going to pay you more. So think about what job you’re going to get and you’re looking to get with your degree. Look at what the average first year salary is, and that should set the baseline of not exceeding that amount. For a student like me, I, I had 130,000 in student loan debt when I graduated from. You’ve never.

Mark

Told me.

Mat

That. Yeah. 130000 hours now I paid it off because I don’t love debt. Didn’t want to be burdened with this. I paid it off and I do want my 20,000 check. Mr. Biden. But that’s cool. You’re a little late on the drop here for me. So but I was going to law school and I knew I would, and I probably took a little more, but I had to I had a family. So. But think of those what you’re going to make at the end of the day in the career pursuing. I love it because it’s an investment.

Mark

Yep. I’ve heard people work the concept. I want to just say there is work backwards. So many kids go to college, what are you going to do? I don’t know. I was working on a campus, teaching some classes last year and I’d love to sit down with. It was shocking. I go, What do you what’s your major? And they’ve got a major. And I go, Well, what does that do? Like, what are you going to do with that, major? Well, I’m, you know, go. Know right now. And what’s your average salary? And I’ve seen people say one X or two X at most student debt on your annual first year salary. I like the one X, just whatever that first annual salary is. Start with the end in mind. I want to say something else too.

Mat

You know what they say though, Mark? Not all who wander are lost. But you know what? They’re not going anywhere either. So if you’re in that category of people that are all kind of wandering a little lost in college, it takes you a while to actually get somewhere. And so I think college and the way I’ve tried to approach it is this is an investment in something. If you’re going to spend four years doing something, what are you getting out of it? Is that degree going to help you in your life or is this just some transition period of your life to adulthood that you’re just going to rack up a huge student loan debt?

Mark

I love it. And and so in college is an experience that I think I’m a firm believer in because I did it. Now, here’s another other twist here for some of you that are approaching college Now, you’re we talked about those that are in debt. We did the rant, yadda, yadda. Now, this is about your approaching college for your kids as well. I know that many people listening here have the children. So this is these are some important points. We pay the price. I’ve got a child in college right now. I’ve got my kids are between ages 19 and 28. That’s same. He’s got three kids in that same range, finished or finishing college. So we’ve got some life experience here. So let me say another thing. I graduated with college with no student debt. Law school and a master’s. It took me 11 years. Matt Sorenson did it in half the time. He had 130,000 in debt. Both situations were OC. Both were different. I ran a business and had Matt worked his butt off for college too to keep it at 130. I’m not taking away from that, but I took longer to get through school because I ran a business and paid for a lot of that and I had two rental properties during that process. I sold the rental property to pay for college. In that process, I did two rehabs during college. I so I had a longer experience through college and that’s okay too. If you’re if you’ve got a kid that’s wandering around as a freshman, get them the hell out of college. Sit down and go, Let’s work for a year. What do you want to do? Let’s find a career path for you and get back to college with a purpose and get that kid involved in real estate. Get them involved in the metaverse or in crypto. Get them involved in the stock market, Get them involved in something where they find a vision, but go to college with a purpose and take your time. It’s okay to take your time. I did. So yeah. Another perspective.

Mat

Yeah. What I would say let’s hit. I want to hit like a couple of don’ts and then let’s get into the do’s because I want to talk about what you should be doing. You’ve got there’s some strategies here I don’t want to like. Well, this is the.

Mark

Place this should.

Speaker3

Be.

Mark

Yeah, this should be.

Mat

But let me hit a couple of don’ts. Don’t raid your own retirement account. Take out a home equity loan to pay for your kid’s college.

Mark

Don’t do it.

Mat

You have got to worry about your own retirement first. I got to think about other strategies, and we’ve had those clients over the years that have done it, and they’re terrified because they’ve raided the equity in their house, they’ve raided they’ve taken out money out of their retirement account, and they’ve got nothing left because they blew it on their kid’s college. You know, we have a financial advisor, former financial advisor that works at directed Ira. I remember him telling me one time he said when I would meet with a new client, he’s like, We were trained this way. People are more inclined to save for college for their kids. They’re more motivated to do that than to save for their own retirement.

Mark

Where the hell does that come from?

Mat

If the pressure, if you want your kids to be successful and be taken care of, you love them. You’re supposed to provide for them. I mean, you are. I get it. I get that sentiment of people that want.

Speaker3

To do that.

Mark

But we have at my house what’s called the Kohler independence plan. Yeah, I’m not kidding. It’s a contract that my kids had signed. Matt knows this.

Mat

Yeah, I know. I know about the KIPP.

Mark

Kipp Kohler independence plan. It is trademarked. But no, I literally with my kids, when they graduated from high school, I said, Here’s your independence plan. You’re going to be paying for your own crap within four years, and we’re going to do it over process and over a period of time. And if you want to go in student debt, it’s on you. I am not paying for your college. Here’s what I’m going to pay for over the next four years as we transition you to independence. Oh, you want to bitch and moan? Well, guess what? I was a janitor for ten years and ran a small business and fixed up rental property while I went to college. You want something better? Go find a different parent, you know? So, I mean, that’s the conversation. And I said, Sign here.

Speaker3

And they signed the Kohler business plan, and.

Mat

There’s some perks in there, you know? I mean, it’s not it’s not, you know, you transition.

Mark

I do because.

Mat

I get it. You have kids that graduate from high school. They don’t know what the hell they’re doing.

Speaker3

You throw them out.

Mat

Yeah. You got to have some balance here. Yeah, that’s why that’s the. That’s the spirit of the caller.

Mark

Yeah. You want to pay for a consultation for an hour? I’ll tell you about the color independence plan, but I don’t have time to. If we can do it for free, for everybody to bed. Yeah, Figure it out. All right.

Mat

All right, Let’s let’s get to some of these tools that you can use. And some of you have heard of these.

Mark

Four downward in the saving.

Mat

Phase. Now. Now we’re in the same phase because. Okay, let’s let’s back up. Debt is paying for something you can’t afford.

Speaker3

Right.

Mat

Save if you want something.

Speaker3

Save for it. I hate that. Is that. Yes.

Mark

But what if I want it now and I will pay for it later? Can I have it now?

Mat

No. You don’t have any money.

Mark

Well, I really, really want it right now. And I know I can pay for it later. Can I have it now? No. What if I buy it now and then pay for it over time? Can I do that?

Mat

No. Yeah. This is a Steve Martin.

Mark

I’m confused. I’m confused.

Mat

It’s an SNL Steve Martin skit on debt here.

Mark

But you did. You did great. Amy Poehler there.

Mat

I was trying. I didn’t know my lines very well. But you were doing Steve Martin pretty good, so. But. But seriously, like, I know it sounds obvious and I know it’s tough. You’re right. You’re sacrificing to save. You’re choosing to set this money aside. But for those you have kids that want to send them to college and help them out. We love that.

Mark

Don’t do it with your money.

Mat

Don’t do it with your retirement. No. Don’t do it. The equity in your home. That’s for you for the long haul, for your financial security and everything you’re working for. There’s a better way to save.

Mark

And I know some of you are out there going. It’s too late. My kids 18. 416 Mark, you people, I know what you’re thinking. I’ve sat with hundreds of you over the years on Zoom or on a phone call or in person. You’re sitting there going, Well, when my kid was three years old, we didn’t make enough money to save for their college. Now I’m finally making money. They’re 15 or 16 or 17. We’re looking down the barrel. We’re getting ready to take the SATs. The acts we’re going to be applying for college in the next 18 months or two years. I didn’t have money back then. We’re going to talk about that. So I have to read my retirement. I have to go get a home equity loan. I have to know you don’t have a reality check with your kids. Talk about these hard things that I just mentioned, about how long it took me through to get through school. You have to maybe change your mindset and it’s okay. Do not give up on your future because of some mindset that you’ve got to give them a four year Northwestern degree experience.

Mark

No, they don’t. No, they don’t. Yeah. So I’m going to say this. Some of you are like, well, Mark, my kids, one year old. We’re living month to month. It’s tight. That’s okay. We’re going to start with baby steps. There’s three plans to choose from, and we’re going to start all three maybe. And we’re going to just start saving $10 a week, $20 a week, and get that snowball in the positive sense going down the hill, building inertia. You will be shocked at what just a little bit of savings now in these tax deferred vehicles will create for you in a big, big way. And there’s three of them that we want to rely on. But I think the concept that I wanted to say first is you can start small, but it’s important to start now. And then you get addicted to this as it goes. Don’t wait until you have more money to start it. Start it with $5 a week. Yeah. So three plans. Yep. Laid out in general first.

Mat

All right, we got the 529, which by the way, you can put 16,000 a year in per kid. And that’s the cool thing about it. You can put a lot of money into it, but we’re going to get into some downsides on it, which has to do with the returns being crappy.

Speaker3

But we got the 529 plan.

Mat

You got the Coverdell Education Savings account, or ISA. The Coverdell allows you to put 2000 a year in. Now, these both of these plans, you do not get a federal income tax deduction when you put the money in. The benefit of these is it grows and can come out tax free for college. So it’s a way to save, invest and all that growth you don’t pay tax on, but you get to use it to pay for college room and board qualifying education expenses.

Mark

And quickly, Matt alluded to, did you hear him? The 529 allows you to put in more, but you don’t get to control the investment and the returns might be crappy. With the Coverdell. You can only put in two grand, but you can control the investment and get 2030 ex returns with self directing. Who knows? The third option or third possibility?

Mat

The one that always gets left off the table because people don’t think about it for education. But it happens to be my favorite and there’s two different ways to use it. Go ahead, the Roth IRA. And remember, you’re thinking about Roth IRA. That’s for retirement. That’s not for education. Hear me out. We like to say that here.

Mark

Hear me out. I’m going to lower you into pit by your feet. Hear me out. Hear me.

Mat

Hear us out. All right, Roth Ira, You put six grand a year into it. Or if your kid has earned income, they can put six grand a year in it to it. Or if you’ve got a spouse, they can put six grand a year into their Roth right there, you got 18 grand. You can be put into a Roth IRA every year. You can invest it in whatever the heck you want. It grows and comes out tax free at your retirement. But also that six grand you put in every year, you can pull it out for whatever you want.

Mark

If I penalty free, tax.

Mat

Free, if I did five years of contributions in a Roth IRA, and that’s 30,006 grand every year, five years, $30,000, and that account now is worth 45 grand from all the investments, returns, everything. Well, I can still take out the 30 grand and use that to pay for my kid’s college and that other 15 of extra growth. It’s sitting in my account and it’s there for my retirement in the future. And it was a great tool to save. I didn’t have to pay tax, but I got to get that money back out. I can use it. No penalty.

Mark

Okay. Now I’m going to catch Matt here.

Mat

And are you going to bomb people out?

Mark

I’m going to know I’m going to I don’t know how to say this, but you said one thing and then said another. So I’m going to say this. Matt’s number one rule was, don’t pull out of your retirement for your kids. And I would mean also contributions. So these are Roth IRAs for the kids, in my opinion.

Mat

Or let me say this because there’s two ways to do it. You can do the Roth IRA for the kids if they have earned income.

Mark

Small business, baby. Here’s the book right here on the desk.

Mat

Exactly. Yeah. Or they got a summer job. Whatever they have to have babysitting. Yeah. Yeah. But here’s the thing. If you’re not contributing to a Roth IRA already for yourself and you’re like, I need to start putting money away for my college kids education, what account should I use? I’ve done the Coverdell for two K. I might do the Roth IRA, and I’ve had lots of clients do that, even though it’s in their name.

Mark

Okay. All right. Kind of contradicts your first statement a little.

Mat

But maybe.

Mark

Matt saying, well, they. We’re doing a solo 401k. They’ve got other retirement vehicles.

Mat

Guys, you’re contributing to your 401. K. I’m not saying that’s your only retirement account and I’m saying these are new dollars you’re thinking of saving for your kid’s education, not peeling it out of your retirement.

Mark

Strategy or.

Mat

Progressive planning.

Mark

Strategy. Good. I just want to clarify that. I knew what you meant, But.

Mat

But it’s a tool that a lot of people just aren’t using.

Mark

You know? I. I don’t know which is best for you. That’s the trick here, because how many kids do you have? How old are they? What’s your income at? Are you in personal debt? Do you have some credit card debt? We’ve got to get out of doing an overhaul, kind of an overhaul of your financial future personally. I just I know this is a Christian statement that many of you’ve heard. Don’t give someone a fish. Teach them how to fish. And before you can help someone else, you’ve got to make sure your own house is in order. And those are some biblical parables and analogies.

Mat

That match there. Yeah.

Mark

I know. But, you know, you’re going to hear things like that on Sundays. But the point is, people, you’ve got to take care of yourself. You’ve got to make sure you’re healthy financially before we start worrying about the kids education. And then when you do say, okay, it’s time to help with the kids education, let’s make sure that we’re building it as part of our overall plan. And it’s coordinated. And so we just want you to make sure these tools are on the table for discussion. A lot of financial advisers, they’re all in on the 529. That’s where they get the biggest commission. So that’s where they make the most money. That’s what they’re sold. Just like the financial advisor quoted, that’s now works for us to direct it. He’s like, that was our that’s what we were trained to talk about. 529 Didn’t even bring up the Coverdale, didn’t even bring up the Roth. So you’re getting some inside knowledge here of these other strategies work, but you’re not hearing about them because they don’t work for the Wall Street sales machine. So you’ve got to be able to talk about those and learn about them and bring them to the table with your financial planner, your tax attorney. Our tax attorneys would love to talk to you about this. We’re not going to tell you what to go invest in, but we’re going to tell you what structures work.

Mat

Yeah. Here’s one thing I just want to contrast some of these accounts as you’re thinking about it. And I know you challenged me on the Roth for yourself. That’s a set aside for that could be maybe used for your kid’s education. Again, I’m saying these are additional dollars you wouldn’t otherwise be saving for retirement that you’re setting aside for your kid’s education. You just happen to use a Roth IRA.

Mark

Because you’ve already got your own retirement plan going.

Mat

Yeah, sometimes your kid doesn’t go to college. You’re like a college kid. Your kid doesn’t end up going to college. All right? Okay. And you have money. Well, that Roth IRA is still sitting there for you. What happens if you put it into a 529 or Coverdell? Isa, you can move it to another kid. Let’s say you got a younger kid coming up that might go to college. But eventually, if one of your kids doesn’t use it, you can actually transfer it to like a niece or nephew and other family, extended family members that could use it. But eventually, if you don’t, you’ve got to take it out and distribute it. You’ve got to pay tax on the growth so it it only can get used for education expenses. Whereas the Roth, again, I’m not trying to always I’m always know I love it. I love hard, has some other it’s got a little more flexibility to it if your kid doesn’t end up going to college.

Mark

Yeah, love it. Here’s some. So we don’t pooh pooh on each one and we talk pros and cons. The 529 There’s a state tax deduction and a lot of states for the 529 which a lot of people like. Also grandpas and grandmas can throw money into a 529 and you can exceed the 16,000 per year with some other methods. So the the 529 is can get supercharged very quickly. But your rates of return are based on the state plan you choose and you don’t have to go to college in the state where the 529 is maintained. But it is. Smoke and mirrors there is so hard to actually discover after fees what your actual rate of return is in your 529. I was debating with Katie, one of the attorneys in our office. I’m like, Yeah, I couldn’t find what the rate of return is on the 520 oh oh. She goes, No, you can find it and I’ll go after fees. Oh, well, those are buried in there somewhere. Right. So the 529 again, we have to know. But the good thing is you can put a lot of money away. You get a state tax on the Coverdale. Oh, I love the Coverdale. Yeah, Coverdale. So cool.

Mat

Well, the Coverdale, you can invest in whatever you want. We have lots of Coverdale at directed IRA. People do real estate deals in it. They invest in startups. We have a lot of Coverdale that have bought crypto, you know. Yeah. And they’re holding it for the long haul and they’re thinking these investments are going to play out. You could buy stocks, you could just buy the S&P 500 and fine, you could buy Apple whatever you want. You can pick a specific investment asset. The 529 is like a state managed fund. Like they just have an investment manager that gets all this money. If everyone’s 529 and they get a run it, they get it charged their fees, they put whatever mix in. They never seem to be able to beat the general market and then they get to take their fees out. And then you guys, everybody else gets what’s left. That’s the awesome. 529 Yeah, but some people still use it and I’m not saying don’t use the 529 actually, I’m saying think about the Roth IRA and the Coverdale first. I would actually go on that order or maybe Coverdale Roth, but then 529 later and I get it, people that do the 529, they’re like, you know what, This year I just have like an extra ten grand, 15 grand. I’ve already done those. I just want to throw out the 529. I want to have this thing just growing and knowing it’s there for my kids. Yes.

Mark

The state deduct that.

Mat

Yeah. Yeah. Like in Arizona there’s a state income tax deduction for it where I’m at and I know it’s not huge, but it’s something, you know, it’s a little perk that.

Mark

I like it. Bare minimum. Start with the Coverdale, then go to the Roth and go to the 529. I like that order. Now, here’s another tax strategy in this mix. Hence my book, Tax and Legal Playbook. Here is read. Take a breath. We advocate for this. Quit paying taxes at your bracket on your tax return and then funding your kid’s college retirement. I’m sorry. Let me repeat this. I want to make sure we got a good sound bite here. Quit. Quit paying taxes in your bracket on your tax return and then taking your after tax dollars to fund your kid’s college savings. Put your kids on the payroll or as a subcontractor or as a non withholding employee in your small business and let them fund their own college savings. Your kid can put money into their Coverdell, Your kid can put money into their Roth, but you get a tax deduction to pay them to do it. So when my kids were starting on payroll, six, seven, eight years old, I’m not having to withhold FICA. I’m not giving them W-2s. They’re not having to file a tax return. It depends on the state you’re in and the dollar amounts. But this is all in my book, Tax and Legal Playbook. Pay your kids. Get them involved in the business. It could be a rental property. Now you’re getting a write off and you’re funding their Roth. It’s a backdoor. People, you don’t get a write off for a Roth. We’ll pay your kids, get a write off and let them fund the Roth. And then you kind of backdoor it. And I love that strategy.

Mat

Yeah.

Mark

Your kids fund their college through a write off.

Mat

Yeah. Get them involved in your business. Gosh, that’s what a great education that is in and of itself.

Mark

For.

Mat

The school you’re going to send them to. So and there has to be a book on that about paying your kids. It’s in the tax legal playbook. We have prior podcast episodes on just that strategy strategy alone where you can go deep on it.

Mark

Yeah, and I’m over here on the other side of the desk, we’ve got the self-directed IRA handbook, which you can dive deep on the Roth and the Coverdale and how you’re going to invest those and what your options are. Ooh. Speaking of which, we’ve got the directed IRA Summit coming up in October here in Phenix. You can come in person, get online. And we’ve got a day and a half of just incredible content on this very affordable.

Mat

October 20th and 21st SD IRA summit dot com. Mark and I will be there of course drop a knowledge. We have awesome speakers and a lot of investment topics this year. Actually. I’ve got a lot of people that have expertise in certain investment assets we’re going to be talking about. We’ll be over how to make sure your accounts are in compliance and you know the rules and how to get started. But we’re going to hit like, all right, let’s take this thing in the next level. How do you analyze investments? How do you make decisions from real estate to private funds to all these different things we’re going to be hitting? It’s going to.

Mark

Be it’s going to be good. I’m like.

Mat

I want to where should I learn more about this? And it’s about the investment assets. That’s what people want to know.

Mark

And also, if you’re like, well, I haven’t started a side hustle or my side hustle really isn’t producing the income I want. I’m doing the first week in October, my Costa mesa, eight Steps to Start or Grow Your business to day workshop. Very affordable again, it’s going to be down in Anaheim, Irvine. I’m going to say it’s going to be in Irvine. All those Orange County going to be an Orange County come.

Mat

Down, O.C. It’s.

Mark

Going to be No O.C. Come down. And that’s two days on building your business. I have a lot of parents that bring their kids to that. I love to talk about the lemonade stand and how that concept, when kids can get their heads around it. And so if you want to build your business, that’s the first week in October and you go to March at Qualcomm, check out that workshop you can watch on Zoom. It will be recorded. And I have an eight Steps workbook to build your business. Even some of you that have successful million dollar businesses find, oh my gosh, your chapter on the marketing or on the business structure, the legal or the tax was so helpful. So and we’ve got resources for you. We’re not just going to throw this out and say good luck.

Speaker3

Yeah, yeah. Off with you. Yeah.

Mat

Yeah, we got you. Yeah. So let me I just want to hit a couple of things. Just because we’re not going to be able to unpack every topic we talked about. But let me say this. We have a separate podcast episode on Pay and your kids. We have a separate podcast episode on Coverdell and 529 comparing, we have separate podcast episodes on Roth IRAs and how they work that goes over this stuff in in their entirety. We’re just talking about how to use these individual tools and strategies for education and paying for your kid’s college. So think of these strategies. There’s more to learn on them, but it’s not rocket science either. I always say it’s like playing a board game. You just got to learn the rules or do it with someone that’s done it before. Once you have that down, you’re good to go. And once you start using these accounts and you figure out what works for you, you do the same thing every year. It’s the same thing. I’m using the same accounts, making the same contributions. It gets a little easier not setting up new accounts. I didn’t figure out the process and everything. You get everything linked. You see how it’s going. He’s getting a good routine. Then at the end of the day, if you’ve been doing this for five years, ten years, I don’t know your timeline here on kid going to college. You’re like, Oh my gosh, this is so nice to have this money set aside. Kind of like saving for anything like a vacation, a car. I mean, you know, anything in your life like the new. I don’t care what it is like. Oh, I can actually pay for this. I don’t need to go. Can I get three easy payments? You know.

Mark

I hate those words.

Mat

There’s some satisfaction in that. And and also, you know, and I know there’s this urge to not have your kids have student loan debt. I was the same way. You know, my kids decided to go to state schools and they both they got my two older ones. They got full ride scholarships for academic distinction. That’s another thing to talk to your kids about. I gave my kid perks for that. I said, Hey, if I don’t have to help you in college because you get a scholarship, I don’t have to pay for your tuition. I’m going to help cover your room and board. I’m going help cover your car expense. You know, and I think one thing is let your kids be aware of that before they get there. Talking about it. Let your kids be aware it gives them something to work for. They know that good grades pays, that it’s going to help them. They don’t know that your kids are teenagers. They do not know this. Yeah, they don’t. You have to tell them.

Mark

And I think expectations of parenting and I guess we’re giving parenting advice, heaven forbid. But my kids are like, Do not go there. You suck. But anyway, parenting advice. Another 101 is communicating with your kids expectations. Some kids think they literally graduate. You’re like, Oh, you’re not paying for college. And some parents are like, No, go get out. And they just throw the kids to the wolves, you know, and they’re out waiting tables. And so the sooner you can sit down with your kids and go, okay, here’s our plan. By age 25, age 24, 23, whatever it is, we want you on your own. Here’s how we’re going to help you do it, but we’re not going to do it for you. And that Kohler independence plan was a reality. And the kids are like, okay, well, now I know. Know, maybe it was a little emotional at age 16 to realize, Oh, I’m not going to be on the family wagon that long, okay.

Mat

And I’m not going to be living in your basement at 30 and doing my laundry.

Mark

No, no, no. So having that conversation early on and setting expectations is so helpful as a part of resources too, if you get to March Kohler. I have a whole article on 529 versus essay just published it last month. I probably need to go edit it and back off. Brett rants on 529 Get on to the Coverdell Roth 529 Plan a little more. As I said, we really beat the crap out of this with our lawyers in the last month and think we came up with a better equation, a better algorithm. I think we crack the code on this.

Mat

Yeah, you could say that.

Mark

Yeah. Okay. Well, all right. Just help my friend. Yeah.

Mat

Thanks. Everyone. Please get over to directed/podcast because we got an open Forum episode coming up. You can submit your questions there on any self-directed topic you want. If you got more questions on the Coverdell or the essay we talked about today using the Roth IRA for education expenses submit those over at directed IRA dot com slash podcast and we will be back next week with another amazing episode directory podcast. Thanks everyone stay calm and self-direct on.