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Coverdell Education Savings Account: Things To Know

John Hyre


Coverdell Education Savings Account: Things To Know – Video

Video Transcript

John Hyre: Something I want you to see on Coverdells. How do we take a $2,000 Coverdell and grow it? I’ve given you one technique and there are others. But usually, what my workshops, about a third of the workshop, is I get some pretty sharp people in the room usually 20 to 30 people like you and we discuss.

Can you do lease options? Can you do assignments? Can I do a flip? Can it lend money? Can it lend money but the interest is measured as a percentage of profits? In other words, a participating loan, and by the way, the answer is yes, and I like that strategy a lot. Well, one of the things I’d like to point out, if you can get the Coverdell set up, it’ll pay for as I said, University and K through 12.

Here’s another nice addition, it’s one of the few parts where the Internal Revenue Code was actually coherent. You can pay out of the Coverdell expenses for the purchase of any — I like this: any. Oh, that’s so broad. Expenses for the purchase of any computer technology or equipment or Internet access and related services — oh, repairing the thing, learning how to use the thing, utility bills.

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If such technology equipment or services are to be used by the beneficiary – that’s the student – and the beneficiary’s family. It even says the family can use it. During any of the years which the beneficiary is in school. Clause three, shall not include expenses for software designed for sports games or hobbies unless software’s predominantly educational in nature.

I guess the trick is not enough of it to be a hobby. What’s my point? Wow, not only can you pay K through 12 in University, you can also pay for pretty much all your home computing needs not just a computer and the printer, but the software, the training and the utilities. Interested? Now, it takes work that’s the part people don’t like. Here are two catches I always hear about the Coverdells. If you make too much money you cannot contribute to them. That’s true.

I have an uncle. He hates the government. I give him a $2,000 gift. He then contributes on behalf of my kids. You can do that with about anybody. I said it on camera, I don’t think it’s shady. I wouldn’t say it on camera, on tape – actually I wouldn’t say it anyway. But especially wouldn’t say it while being recorded. I think that’s legit. As I mentioned, you can only put two grand a year in it. But did we talk to you about some ways to balloon that two grand.

Now, if you want to get really interesting and aggressive, at my last workshop we had a wonderful audience. We came up with a new concept, we really did. In fact, I bought the guy a bottle of scotch on the spot $50.00, 10 year old Laphroaig. Nice ale malt with a sort of peat and smoke taste, yummy.

He came up with the idea we just — I came up with the term but he had the idea. You can transfer ESA accounts to other family. Family is very broadly defined, very broadly; cousins, nieces, nephews, whatever. Because the kid, the student has to transfer the SISA or lose it. It has to be distributed and taxed when they hit 30. I guess the government’s kind of saying, “You’re 30, get out of school, get a job and a haircut.”

At 30, the ESA distributes unless you transfer it to family. I came up with the idea that my sister has kids younger than mine so I might transfer it to them for a fee. Because it doesn’t say I can’t charge. “Hey, Lisa here’s $100,000 and tax-free money give me 90,000 or something along or 110,000 or whatever.” I don’t know we do the math.

How about this? Because this was a Scots, no he’s an Australian. He was not sane therefore he was Australian. He did not take that as a dig at all. He took pride in it. He’s like “Yes, and we’re also descended from criminals.” or at least the good Australians are. Sounds like him, they have a great sense of humor.

He came up with the idea of a “Wait a minute John, how about you want these to last for your grandkids? So your kids use these and then your youngest kid turns 30. Because you have another family member maybe a cousin or something put it into that kid’s name and they hold it until you have grandkids and they transfer it to the grandkids?”

Under the law, I don’t see anything that says we can’t do it, which means, we can. It’s a bit gray but I’m not worried about it. Because the alternative is to distribute it. Instead of a holding company because we all heard of holding companies the one that owns the other companies. We have a holding child, the child holds the ESA between the generations as long as they’re family. You keep the ESA just like a nice little volleyball match “Hey yours, okay yours, no, no spike, no spike.”

I like the idea. But you have to be willing to exert the effort. The 401(k) is easiest. Why? You can put enough money in a 401(k) to buy a property, free and clear no debt, right? You pump 50 grand on that thing for three years. You can go buy something for $150k, simple. And that’s fine if that’s how you want to do it. I’m just giving you some thoughts on how to go better.

For the ESA, given what a lot of your brackets probably are, you’re going to have to find someone else to put the two grand in. You just go ahead and give them, and that’s fine. You’re going to have to find a way to grow that two grand. You have to think to yourself, is that realistic for you or not? I do enough deals and again, for me, low income properties because of the cash flow work for me. That may not be your thing. You have to try and adapt it to your circumstances. There is work involved. You have to avoid prohibited transactions. You’re dealing with a lot of management: property managers, maybe LLC managers.

You’ve got some moving parts. There’s a cost, but if you remember what the benefit was, I sincerely hope it’s something you’ll do.

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