Directed IRA Podcast

College Saving Strategies You Never Thought Of

• Mat Sorensen and Mark Kohler

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In this episode of the Directed IRA Podcast, attorneys Mat Sorensen and Mark J. Kohler unveil a powerful and often overlooked strategy for funding your child’s college education without relying solely on a 529 plan. They break down how to combine a Coverdell ESA and a Roth IRA for your children, integrate those with self-directed investments, and potentially achieve tax free growth and distributions.

This episode is for business owners, parents, and investors looking for a smarter tax efficient way to save for education. Whether you’re new to self directing or already using these tools for retirement, this strategy could reshape how you approach college planning and family wealth building.

Chapters

  • 00:00 – Introduction to College Funding Secret
  • 01:17 - Self- Directed Accounts for College Savings
  • 03:35 - Kids Roth IRA Strategy 
  • 08:14 - Tax-Deductible Methods for Funding 
  • 12:17 - Legitimacy and Next Steps

Directed IRA Homepage: https://directedira.com/

Directed IRA Explore (Linktree): https://linktr.ee/SelfDirectedIRA

Book a Call: https://directedira.com/appointment/


Other:
Mat Sorensen: https://matsorensen.com & https://linktr.ee/MatSorensen
KKOS: https://kkoslawyers.com
Main Street Business https://mainstreetbusiness.com



Speaker 1:

Welcome everyone to the Directed IRA Podcast. This is Matt Sorensen, joined by the incredible Mark J Kohler. And boy, we've got a special message and a tip for you, a strategy for you.

Speaker 2:

Yeah, no, I am so excited about this. And if you're clicking on this as a parent thinking how am I going to save for my kids' college, I want to know any possible strategy out there. And if you're a new listener, thank you for being here. Matt and I are both tax lawyers. We've both done our 10,000 consultations. We've got a couple of podcasts, a big presence out there, and this is a message we talk a lot about. And here's the trick this secret is really a combination of several strategies. It's not just a 529 plan. No, we use a concert of several strategies together. We're going to talk about the 529 a little bit, but it's really about the Coverdell IRA, the Roth IRA and an investment strategy where you look at, how can I get the biggest return to build my college savings account for my kids? And it can be completely tax deductible too, which is weird. So we're excited to share this with you, Matt. I mean, that's the way I kind of bring it together. What's your? How would you say it in a nutshell?

Speaker 1:

I would say I would say the secret sauce and I don't want to bury the lead here is you're going to self-direct it and invest that account, these tax advantage accounts, the Coverdell account, the Roth IRA and assets you know and believe in that are going to do better than the target fund you have to do with the 529 or the mutual fund or stock you were thinking about with the Coverdell. It's about investing these tax advantage accounts that you can use for your kid's college into assets you believe in that can grow, and we've seen clients do this at our company Directed IRA. I've seen the expense payments go out to Ivy League schools where the parent invested a Coverdell for their kids into real estate transactions had phenomenal returns on them. They put them in incredible deals and then that got the gain back. No tax. The money went out totally tax-free to pay for their kids' college education. So awesome strategy. Here we're going to unpack some of the pieces to it, but that's what we're talking about here.

Speaker 2:

I love the way you said that, matt, because you got it right on the table at the get-go. We're going to combine this self-directing strategy and some of you have maybe never heard of that and self-directing means investing in alternative assets or the businesses and assets that you understand, that you know are going to get you a better return than a Wall Street product and combining that with the Coverdell IRA, which, yeah, it has a terrible contribution amount, but that's okay. A little acorn can turn into a big tree, and so we want to be using that Coverdell strategically with this self-directing strategy.

Speaker 1:

Yeah. So now, keep in mind, with this Coverdell, you can put in $2,000 a year and that's where you're probably like well, $2,000 a year, how am I going to get that right for it? How can I? You know? How's that going to cover my kid's college? Well, it's the investment gains and returns we're talking about and how we want to build this, and we have clients using Coverdell's, like I said, for real estate investments.

Speaker 1:

We've had clients use Coverdell's for crypto. You could do a crypto Coverdell IRA. We're going to get to kids Roth IRAs here in a second another pretty cool strategy but these unique type of accounts are accounts you can use to sell. Now I want you to know, most of our clients are buying real estate private funds, startups, small business, crypto with their IRAs, trying to build for retirement, and it's a very popular strategy. We have over two and a half billion assets. We're opening up sometimes 30, 40 new accounts a day of clients doing that, but it's not just about your IRA and retirement. This is a way you can fund your kid's college, yeah, and I was just talking to a new acquaintance this last week.

Speaker 2:

That was like I'm buying and selling water shares. Two weeks ago I met with a client down in Oklahoma that was buying and selling mineral rights for oil rigs that were moving into their area. And it could be any real property interest, it could be personal property, it could be a startup. So if any of you out there are like holy crap, I didn't know I could do that, yeah, it was funny.

Speaker 2:

I was around a campfire and I was telling someone yeah, well, hold on, I can only put $7,000 in my Roth every year. Yeah, that's when you pass, go on the Monopoly board. But holy crap, you can land on boardwalk or park place and hit it big and you can do it without penalty and without taxes. So the Coverdell IRA you get to put in $2,000 per child and then you can take that IRA and put it into an LLC with your IRA or your solo 401k or an old 401k and now you've got an investment entity that you can invest out of as the manager of that LLC and go invest in what you know best. The Coverdell is just a small part of a bigger concept where you're getting 10, 20% returns or more investing in what you know. Now we'll get into the nuts and bolts, but I think that concept and that process is so powerful once it resonates with people.

Speaker 1:

Yeah, and I think, whether you're starting a new Coverdell, you might have a Coverdell already. Maybe you've got a Coverdell at the broker dealer or something you've been doing for your kids. Those could be transferred over and this is a qualifying account. So when we're talking about these Roth IRAs or this Coverdell, this is the same account you could do at a TD Ameritrade or a Charles Schwab or Fidelity. The difference is we don't restrict your investment options. We'll let your Coverdell or your kid's Roth IRA invest in crypto. We'll let it invest in a startup. We'll let it buy a real estate deal, the water rights, the oil and gas, whatever it might be. These are assets that these accounts can own. You just can't do it at a broker dealer IRA. So that's what we're doing at Directed IRA with many different account types, including, of course, the Coverdell. Now let me hit the kids Roth. Can I get into that one yet?

Speaker 2:

Well, matt let me just at least talk about your contribution procedure. If you're a high income earner Now the current rule is you can put this two grand in. But some of you are already smart enough to go. Well, if you make more than a hundred grand single or 200 grand joint, I can't put the money in, ah, but grandma and grandpa can. So very similar to the backdoor Roth strategy.

Speaker 2:

And, oh my gosh, if you haven't heard of that, please Google Sorensen and Mark Kohler on backdoor Roths. But just like you can't put money directly into the Coverdale, if you make too much money you can gift the money to grandpa and grandma, who can put that money into your kid's Coverdale at the same location here directed IRA and create that self-directed account and then combine it into that LLC. So do not be misled by your accountant who may go you make too much money to do a Coverdell. Hey, your accountant is not getting the real story that you can gift money and go in through a backdoor method, just like you can with a Roth IRA. Some people are like well, I make too much money to do a Roth. No, you don't. Anybody can have a Roth and that's called the backdoor Roth strategy. So just know the Coverdale is available to you. You can invest with it. And then Matt no-transcript.

Speaker 1:

Kid Roth both cool, don't pick one or the other. This is not a competition, they can both be cool. The kid's Roth IRA Now the thing on the kid's Roth IRA is they have to have earned income, all right. So if you're business owners, you own a rental property, you should be paying your kids. Get them involved in the business. If they can make seven grand a year, by the way, you're expensing that in your business anyways, taking the deduction for it. Your kid's picking it up and not even having to file a tax return because they're under standard deduction. It's not even taxable income to them and they're dropping it right into a Roth IRA. Now they could also be working a summer job or something and spending all that money on things that kids spend money on, but you're still throwing in the 7K because they had that much money in their income. So that's the one caveat on this kid's Roth. They must have the earned income. But you can establish that account for them, you can help them with it. You can have the responsibility on the account until they hit the age of 18 or the age of majority in your state. But the nice thing about the kid's Roth IRA there's a number of things about it is one we can go invest it in all these things we're talking about with the Coverdell and self-directed IRAs in general. Your kid's Roth IRA could be investing in those types of investments, helping them grow, teaching them about what it's investing in. But one thing about the Roth IRA you're probably like well, matt, that doesn't sound great. How has this helped my kid in college? This video said college.

Speaker 1:

Well, the investment gains and returns in a Roth IRA you have to wait until you're 59 and a half. But the seven grand a year you pop in there. Let's say you've done this for five years for your kid. They're 13 and they're starting to work in your business and they do it for five years until they're age 18. They've got 35,000 of contributions in there. Maybe the account's worth 70. Let's say it's doubled over that time. Well, that 35,000 of contributions you can pull out whenever you want, no penalty, no tax Contributions to a Roth IRA can always come out and then let those gains be something left in there that they can continue to invest and grow and have a head start with the Roth IRA.

Speaker 1:

That part they're going to wait until they're 59 and a half. On you get an incredible head start. Meanwhile, this money they've been putting aside the seven grand they're able to pull out for college or other education. Frankly, to start a small business, there's lots of other qualifying things. It doesn't have to be qualifying frankly, they can do whatever the heck they want with it. But let's help them do something smart with it, like college startup business, something like that.

Speaker 2:

You know, and I love the way you framed that, matt, because you got my mind racing here and I'm like okay, I want to emphasize two points that you made that I really like. The first one is that you want to create a tax-deductible method to somehow fund the Roth IRA and the same method could be used for the Coverdell. Grandpa and grandma may be great board members for your S corporation or small business that you own. So when you have your annual board meeting, grandpa and grandma are participating in that meeting, giving sage wisdom and advice, which parents love to do, and you're getting. Oh, can I compensate you $4,000 for being on my board this year and would you be willing to accept that and you may choose to fund my child's Coverdale with that payment?

Speaker 1:

Now Grandpa and Grandma will get a 1099.

Speaker 2:

Mom and Dad get a 1099 for $4,000 for serving on the board. Drop it on a Schedule C and I'm sure they're going to be able to find a proper deduction for travel, dining, home office or cell phone coverage to be there and ready for their family as a board member of their small business. So they're going to pay zero tax on that measly $4,000 1099. But in turn, take that money and wisely contribute as a gift to their grandchildren and fund their future college education through the Coverdell. And at the same time, mom and dad are funding the Roth IRA for their kids through compensation for serving in the business, legitimately serving in a proper role based on their age, and funding the Roth IRA. And then, third, combining all of that income into one LLC to invest as a family People. This is not crazy talk. We help clients do this every day. This is real and it works.

Speaker 1:

Yeah, and Mark and I have even done this with our kids yes, working in our businesses, helping them contribute to kids Roth IRAs, paying them from the business for legitimate work that they're doing. And I remember even working on my dad's rental properties when I was a kid. I wish he knew this strategy. He would have loved this strategy. I was out there mowing a lot of lawns. I would have loved a head start on a kid's Roth IRA. So these are strategies we really think can take you to the next level. These are things that are maybe outside the box, but you know what A lot of our business owner clients, entrepreneurs, love the outside the box stuff.

Speaker 1:

That's where they thrive and excel. And this is a strategy that has a ton of upside and potential A lot of great tax benefits. You can be focused on the things that matter, whether it's sending your kids to college, helping them get a headstart with the kids Roth IRA which could be used for college. Again, the contributions gives them a head start on the investment gains. They could also use that money to start a small business or even a technical school. So there's a lot of great perks and reasons this can benefit you and your family.

Speaker 2:

Well, I just want to address some naysayers and give you a call to action. Some of you may be saying well, my accountant hasn't talked like this, my accountant hasn't told me about this, so you guys must be crazy heretics getting all of your clients audited. No, we're not. We are authors of bestselling books. We are the contributors to two legitimate podcasts with millions of downloads. We are both licensed attorneys in multiple states with a law firm that's been around for over 20 years. I am a CPA and a member of the AICPA. We are helping accountants around the country get educated on this with semi-annual events which you can attend as well.

Speaker 2:

Please check out the Alt Asset Summit being held in just the next few months. Get to altassetsummitcom. It's down in the description. We are leaders in this industry. You may need to upgrade your professionals, because if they're not telling you about this, you've got the wrong professional, and so, at the very least, here's my call to action Get a second opinion. Down below, you can hit on the link to our law firm. Do Google check on it. Whatever You're going to find out, we've been legitimate and around for years and years helping small business owners around the country do a consultation called a comprehensive tax plan with one of our tax lawyers A couple grand, maybe three, depends on how many moving parts you have. If we don't save you in taxes the cost of that consultation, send me an email. I'd like to hear how we failed at that. Because we blow the minds of our clients. We save them so much in a plan like this. Please get a second opinion and reevaluate your strategy for college savings. There is a better way.

Speaker 1:

Yeah, thank you everyone for listening. We hope you found this valuable. Please make sure you're subscribed to the podcast, sharing with your friends and family. Give us a five-star review. We'd really appreciate that. We'll see you next time. Until then, stay calm. Self-direct on.

Speaker 2:

And thank you everyone for listening. A quick disclaimer and reminder this presentation does not constitute an attorney or CPA client relationship and it is always in your best interest to consult competent legal and tax professionals when conducting your own personal transactions.

Speaker 1:

We also want to make sure you know this is not investment advice or financial advice. We're just trying to give you education, ideas and strategies you can take to your professionals or conduct your own research on. We'll see you next time.