Kids College Savings - 529 vs Coverdale vs Roth IRA

[Jim Goebel]

Hi everyone, We've been thinking through the best way to save for kids college. We have two kids and have been maxing out our state's 529 plan. Quinn is a 3 year old boy and has about $18,000 in a 529 account already, and Sarah is 6 months and has $3,500 roughly. I just became aware of what's called a Coverdale account, which lets you bundle or partner separate accounts with an existing IRA account. This sounds appealing as our bread and butter and success has come from RE, but of course to buy the best upside deals, one has to have a minimum level of capital - so this creates challenges with growing something rapidly in a Coverdale, because the annual contribution limit(s) are $2k/child. As I understand it, that's total, so you don't get to contribute that on a per parent basis.

In a 529, we are kind of forced to invest in standard offerings (much like a 401k) through our state's program, so we do not have the option of taking advantage of the returns being achieved in our RE, which have been substantial and far better than the stock market.

Although I do have desire to diversify especially for the kids, I'm also wanting to rapidly grow an asset base for them that will create income, going back into the account.  The sooner we do this, the sooner we can justify not socking money away which takes money out of our cash flow and household.

My Self Directed IRA owns a roughly $150,000 asset free and clear and produces about $1,100 / mo in free and clear income, which is great. There's also about $25,000 in cash in that account to work with. The issue as I understand it, is that my Traditional Self Directed IRA, and only a ROTH IRA has the tax free benefits of a withdrawal for qualified educational expenses. I was just informed over the phone by our self directed IRA custodian Strata Trust that there is a way to transfer balances (including RE assets) from a traditional into a ROTH IRA, which sounds great.

The other avenue that I was exploring was going down the Coverdale, and partnering with the Self Directed IRA funds, to continue doing real estate. This was suggested by a representative at a custodian called Equity Trust. She seems knowledgable and it got me thinking about ways to use RE to more rapidly increase funds in these accounts for the kids.

Now, if I'm understanding correctly, especially given that we already have nice base within the self directed IRA - it seems that if there's the same tax advantages (no penalty upon withdrawal for college, mainly) - at this point I'm seeing pretty much NO advantage to the 529 or Coverdale accounts, beyond, perhaps, if we wanted to go beyond our contribution limits for one - and if we didn't want to use the Self Directed IRA account for those college savings purposes.

If this is the case, I am leaning towards advocating in our family to wean the 529 contributions significantly (but not entirely) and keep aggressively working to grow the Self Directed IRA balance, and acquire additional income producing assets. And, transferring over to a ROTH Self Directed IRA, vs. the traditional that's in place now. I'm wondering what I'm missing in terms of any downsides/disadvantages. Advice welcome, thanks in advance!!!