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Lillian Karabaic:
This show is supported by generous listeners like you through our patreon. This episode was underwritten by the Tamsen G Association.

Lillian Karabaic:
To learn more about ways to support Oh My Dollar! and get cool perks like cat stickers and a fancy special icon on our forums you can visit ohmydollar.com/support. Welcome to Oh My Dollar!, A personal finance show with a dash of glitter. dealing with money can be scary and stressful. Here we give practical friendly advice about money that helps you tackle the financial overwhelm.

Lillian Karabaic:
I’m your host Lillian Karabaic.

Lillian Karabaic:
Have you been confused about 529s?

Lillian Karabaic:
I know we’ve talked about them plenty of times on the show but I know it’s just another gobbledygook letters and numbers out there and we’ve kind of vaguely looted to them and we’ve also kind of talked about how they vary a lot by state – what they look like.

Lillian Karabaic:
So, to help us demystify it today’s guest is Abbie Chao. Abby is the co-founder and COO of Collegebacker, an online service that makes saving for college simple, smart, social and most importantly accessible to everyone. CollegeBacker has designed a service to help parents open a tax-advantaged 529 college savings plan with no minimum.

Lillian Karabaic:
Parents can help and can then invite family and friends to contribute. Abby has helped thousands of families save and pay for college. Her modern tech-forward approach helps the next generation of Millennial parents use the right financial and social tools to save for college better, together. Oh Abby I’m so excited to have you on!

Abby Chao:
Thank you so much for inviting me today.

Abby Chao:
I’m so ready to talk about 529s. I have such a long list of questions for you. I hope that you can just help kind of demystify what is yet another, mythical account with random numbers for a name to keep track of, out there.

Abby Chao:
Absolutely.

Lillian Karabaic:
So we’ve talked about 529s before in the show, but I think a lot of people still don’t understand what it is. What is a 529?

Abby Chao:
So if you are one of those people who does not know what a 529 is you should not feel alone or intimidated at all. Because 70 percent of parents have no idea what it is. And so I’m really glad I have this opportunity to talk a little bit about it.

Abby Chao:
Basically it is a tax-advantaged way to save for college, and you can think of it almost like a retirement account – in that you’re investing the money and it actually grows tax free for a 529. And then when you make withdrawals of those it’s rather tax-free as well. But almost like a Roth IRA. But for college.

Lillian Karabaic:
So let’s imagine that you save a lot in a 529. You start this the second your kid was born and you managed to invest it well – is it going to end up affecting financial aid that your kid gets?

Abby Chao:
So this is a great question and often a huge source of stress and confusion for families, because you might be thinking “oh you know I want to save for college but I also want to maximize my financial aid and I’m afraid that if I say maybe that’s going to impact my financial aid.”

Abby Chao:
Actually a 529 is one of the best ways to save for college, that minimizes impact to financial aid. And here is why: when you save any money for colleg, it could have some impact on financially but oftentimes the other tools that you’re thinking about are going to have an even greater impact.

Abby Chao:
So if you are saving in a savings account for your child, if you are saving your own in your own retirement account for example, and you’re planning to take out that money in order to pay for college – that could impact the financial aid by changing your expected family contribution (the amount that the college expects you to pay.) It could change that amount by up to 20 or even 50 percent in some cases.

Abby Chao:
But with a 529 it’s only going to affect that amount by up to 5.64% percent. So 5 percent compared to 20 or even 50 percent is a huge difference, and a 529 is a much better way to save for college. That minimizes the impact of financial aid.

Lillian Karabaic:
So that makes a lot of sense because I was hearing you talk about a 529 plan and I’m thinking: Well that sounds almost exactly like a Roth IRA, which you can take out for educational expenses you know, without paying a penalty – and they are post-tax just like a 529. So but it sounds like a 529 is treated a little more kindly by the FAFSA and this CSS profile and the other kind of financial aid navigation.

Abby Chao:
Exactly and I won’t go into all of the specifics on that. But essentially, when you take the money out of that retirement account and give it to the child it can be counted as something like income or gift to the child all in one big chunk, and that what’s really bad for financial aid the following year whereas the 529 is just at that lower rate of around 5 percent. And you know, it’s not going to you’re not going to be surprised when you get your financial aid package.

Lillian Karabaic:
That is good. So if you – if you have a 529 and you set one up can you set one up. You have to set it up for a specific child? Can you set it up for someone that isn’t your own child, like if you’re in a second parent adoption or you have a blended family, can you still set up a 529 for a child?

Abby Chao:
Yeah absolutely. In fact I could set up a 529 for you. If I had all of your information.

Lillian Karabaic:
I’ll take it.

Abby Chao:
I probably don’t. But you can set up a 529 for anybody else and so be your child. It could be a niece or nephew. It could be a friend. So there are a lot of different options there.

Lillian Karabaic:
And does it reduce when you have a 529, does it reduce your overall taxable income so if you’re – if you’re someone that’s trying to reduce your taxable income like you go through and you’ve maxed out your 401K and your traditional IRA, would you also be able to set up a 529 and reduce your taxable income? Or is it just kind of like a different savings account?

Abby Chao:
The only – generally the answer for most people that’s not going to have a significant impact because again the 529 is a post-tax vehicle which means you’re saving on taxes from the growth of the assets but your contribution is not immediately tax deductible.

Abby Chao:
However in some states you can take a state income tax deduction on it – and you’re just going to have to look at the particular rules of your state. So for example for me, I live in California. Unfortunately California doesn’t give a state tax benefit. So there’s no immediate impact from that. But I’m originally from Illinois and Illinois does have that benefit. So I could take a state tax deduction or my parents for example, could take a state tax deduction in Illinois.

Lillian Karabaic:
Ok. Cool. So that is one of those situations where it really is going to be up to the state. Is there is there a limit on how much you can put in it since it is a post-tax?

Abby Chao:
So the limits are pretty pretty generous. I would say there’s actually an exception for 529 where you can do something called super-funding the account which is five years of contributions in one year! So you can actually put fifteen thousand dollars or excuse me seventy five thousand dollars into a 529 without impacting that gift tax exclusion. You just want to be able to do that again for the next four years. And even in that-

Lillian Karabaic:
So that would be good if you got a windfall or something like that like a..

Abby Chao:
And even if you did want to put in more than seventy five thousand dollars, it would just impact your future – you know estate planning – so you might want to talk to somebody about that. In that scenario.

Lillian Karabaic:
That’s when you get lawyers get involved.

Abby Chao:
Yea.

Lillian Karabaic:
So let’s say I’ve set this up for a nephew or for an adopted kid – college isn’t for everyone. It’s hard to predict 18 years out, if your kid is going to go for higher education. What happens if your kid decides they don’t want to go to college?

Abby Chao:
Yes so another great benefit of the 529, is that it actually is quite flexible around these these kinds of decisions. So generally, what we recommend is first of all if if your child isn’t sure and you know they turn 18 and they’re like “I don’t know if I if college is right for me yet, I want to go and work for a year.”.

Abby Chao:
There’s no time limit, so you could just leave the money in the 529 and maybe in the future if your child does decide to go to college, then it’s still available for them it’s not like it expires at any point.

Abby Chao:
If your child, knows for certain that they don’t want to use that for higher education they can also use their excuse me – You could also transfer it to a different beneficiary in the family. You could give it to the second sibling. You could transfer it back to yourself if you want to pursue some kind of higher education.

Abby Chao:
You could change it to a cousin even, so though there are a lot of different options there. However, if there is a case where your child doesn’t want to use that money, nobody else in the family wants to use that money, and you really just want to take the money out to spend it on something else- buy a car and invest in some other you know something else that’s important to you.

Abby Chao:
You can take the money out, the gains on the account will have a 10 percent penalty on taxes but your original contribution will not be taxed or penalized.

Abby Chao:
Ok. So it sounds almost identical to a Roth IRA in many ways.

Abby Chao:
Yes very very similar – but the big benefit being the ability to transfer the beneficiary and do that pretty seamlessly. The other thing that I would say is even if traditional four year college is not for your child, you might want to know some of the other flexible options of a 529 – because it can also be used for many you know community colleges, trade schools, graduate education as well. So the rules just that need to be something that qualify for federal financial student aid and that includes a lot of different categories and even some schools internationally!

Lillian Karabaic:
Cool. So like that you know that that is true if your kid doesn’t want to go to college. Or if they manage, if they happen to get a full ride scholarship, you know like they got their cheerleading scholarship or whatever and I don’t know the full rides really exist anymore. But let’s say they got that. And you don’t use the 529 – and you take it out you pay the penalty, but if you want to leave it around from at them to maybe go to grad school or something. Is it in your name or is it in the name of the beneficiary?

Abby Chao:
Two things on that – one directly answer your question. You are the account owner, so you always have control of the account. Again, even if you know time passes and they’re over 18 or 21, you always have control of the account and then the child is named as the beneficiary. But, you know, you have the power to change that to another member of the family if you so choose. But I also want to make one clarifying point on the scholarship. If your kid does get a full ride you can actually take the amount of the scholarship- out of a 529 without any penalties!

Lillian Karabaic:
Oh!

Abby Chao:
Well another great benefit of the 529 that makes it really flexible because it is specifically designed for education that being said –

Lillian Karabaic:
Very cool.

Abby Chao:
Yeah it’s a very cool benefit. That being said if your child doesn’t get a scholarship and say it’s for you know full tuition, there’s still a lot of other expenses that you know are college related that you can pay with your 529. So you can also use it for room and board, books, a computer. And so even if your child you know, gets a full tuition scholarship – first off, hats off to them – but also you can use that money for these other categories and you know take full advantage of the account.

Lillian Karabaic:
That’s that’s very cool, and good to know. I know in some states it’s possible to use the 529 for high school. So if you’ve if you’ve got kids in private school or you know some sort of magnet school, you can also use the 529 for higher ed but that’s not true everywhere right?

Abby Chao:
That’s right. So this is a new development that you can actually use a 529 for K-12 tuition in some states, but that is something where I would encourage folks to check the rules in your state because it does vary from state to state and you don’t if you did get, say an income tax deduction, from your state you don’t want to get penalized and have to pay that back, because it wasn’t allowed by your state in order to use it.

Lillian Karabaic:
Let’s say like we’re sold like we’re like yes – Yes I want to open up a 529. The process for setting one up like theoretically like you want this money to grow right if you’re signing up when your kid is a toddler, you want it to actually have some gains so it’s better than just saving it under a mattress. What what’s the process by which you kind of choose investments? Do you just do what’s called like a lifecycle fund based on the age of the kid?

Abby Chao:
Yeah. So I’ll say what we recommend at CollegeBacker – then you get some tips for folks who want to do their own research. But, basically, you’re going to want to choose the right 529 plan for you – which might be the one provided by your state.

Abby Chao:
It might be a different 529 plan, then you’ll choose an investment portfolio that makes sense for your kid. And those are basically the two big decisions that you have to make with a 529.

Abby Chao:
At CollegeBacker, what we recommend for a lot of folks is we are going to recommend a state-based plan that has really low fees and has a great you know reputation and history and track record. And then within that, we’re going to recommend at an age-adjusting portfolio, so that you don’t have to stress about it, but when your child was very young it’s a little bit more aggressive. So the the assets are probably going to grow, and when your child is older it’s a little bit more conservative so that you know the money is there when you’re going to need it.

Abby Chao:
If you do want to give CollegeBacker, or you know one of the big reasons we started the company was to simplify the whole process so we tried to make it easy, but if you do want to do your own research. Those are kind of the two big questions that I would recommend doing some research on – is one which 529 plan is going to be the right one for me is it my states or is there another one you could consider fees and tax deductions and those kinds of questions.

Abby Chao:
And then two – what’s the right investment option. The biggest question there being what’s going to be appropriate for my risk appetite – like if my child is young or old – and also what are the fees that are associated with that.

Lillian Karabaic:
Cool. So I mean in many ways a 529 kind of sounds like the middle class ability to have a trust fund for your kids – for education specifically.

Abby Chao:
Yeah to be honest. Once again this was a huge motivating factor for us at collegebacker. 529s really were built for the middle class or originally devised for the middle class, because everybody who wants to go to college or whose child wants to go to college should be considering a 529 – it’s a great great way to get a leg up as you’re along that journey.

Abby Chao:
Unfortunately because it has the great catchy name of 529 – it’s in the very difficult for a lot of people to get into it, because it’s a confusing space. But if you are saving for college most – most folks would agree that this is a fantastic vehicle to do that. There’s a huge benefit from you know a compounding tax-free growth in these accounts.

Lillian Karabaic:
Well there is a lot of states that have 529 matches as well that you can get on your taxes or the state will actually deposit in it as well – so you know it varies state by state on what they look like. And even year to year on the individual states. But 529s are just so cool. Why do you think more people don’t use them?

Abby Chao:
I do think a huge piece of it is just the complexity of the state – you know, the state by state thing and that gets them confused. The fact of the matter is that most of us don’t find it really fun to look at different portfolio options

Lillian Karabaic:
*giggle*

Abby Chao:
and things like that.

Abby Chao:
But I would also say that it’s just scary for a lot of us. You know it feels stressful.

Abby Chao:
It feels like something that you have to figure out on your own you know maybe you feel embarrassed to ask other parents – because you’re like “Oh I feel like other parents probably have this all figured out.” But the truth is that most parents don’t have it all figured out.

Abby Chao:
And if you can find a smooth and easy way to get into it, if it has the potential to be life changing you know for your child. Imagine being able to put your child through school and have them graduate debt free or at least with a manageable amount of debt.

Abby Chao:
How how incredibly empowering that is. And especially another fun fact about 529 is that anybody can contribute to anybody’s 529. And so if you’re receiving gifts from other people into your child’s 529, when your child is walking across that graduation stage, it can be incredibly powerful for them to know that there were a dozen people who believed in them along the way and supported them along the way.

Abby Chao:
So you know we’re really trying to change the conversation around 529s and bring them up – bring them out of these really inspirational and incredibly empowering opportunities to show your support for your child.

Lillian Karabaic:
Yeah yeah I mean it’s definitely great to think that instead of getting loud annoying toys that make noises, you could ask a contribution to the 529 plan for your kid instead.

Abby Chao:
Absolutely. Especially for the emerging generation of parents. I think you know- we’re all sick and tired of all of the extra gifts that are cluttering up the closet. We care more about experiences.

Abby Chao:
We so often you know have dealt with student loans on our own and we’re like “Oh my God I can’t even pay off my student loans. How am I going to help my child?”

Abby Chao:
And that’s what makes college savings such an incredibly meaningful gift, especially for our generation.

Lillian Karabaic:
Yeah. All right. This is something I ask every guest. It doesn’t always make the final cut, but what are your personal best and worst decisions you’ve made with money?

Abby Chao:
Great question. I would say the best personal decision that I ever made was – you know I was a super nerdy kid growing up. I fell in love with personal finance as a teenager and I opened my Roth IRA a probably when I was you know in eighth or ninth grade or something else, I was putting like babysitting money in there because I just thought it was really cool. And so that was a great personal decision.

Lillian Karabaic:
Such a nerd. Yeah.

Abby Chao:
Yeah exactly. But now you know hopefully other folks can benefit from my nerdiness and be able to save better for their kids college.

Abby Chao:
The worst financial decision I ever made was I once allowed myself to get peer pressured into taking a vacation with my friend. And while the vacation was fantastic – the bill was probably an order of magnitude above what I would have personally chosen. And so I definitely felt the pain for that one for a while.

Lillian Karabaic:
Oh yeah. Oh that peer pressure to make the the good pictures on Instagram you know?

Abby Chao:
Exactly.

Lillian Karabaic:
Well, Abby, it’s been a delight having you on. I think we’ll learn all gonna have better information about 529. I hope that maybe the government at some point rebrand it into like a cool name that actually says what it’s for. For now, people can feel like they have secret knowledge.

Abby Chao:
Absolutely.

Lillian Karabaic:
With a 529 if people want to find out about CollegeBacker- Where can they go?

Lillian Karabaic:
Yeah. So I would encourage everyone to check out collegebacker.com/omd – because we want to give all of the listeners an extra gift, if you are able to get started paying for college and start a college fund, we’ll match the first ten dollars that you put into the college fund. So got to collegebacker.com/omd If you set up a college fund and make a contribution of at least ten dollars – we’ll double that with another ten dollar gift from CollegeBacker!

Lillian Karabaic:
That’s awesome. So college bagger can also invest in your kids education. Double your money. That’s pretty exciting.

Abby Chao:
Absolutely. Absolutely. And it’s only the beginning! Hopefully you’ll sharing that with friends and family and they’ll be giving a lot more than ten dollars at the next birthday party here or Christmas.

Lillian Karabaic:
That is such a delight. Thank you so much for joining us today, Abby. I think that our listeners will get a lot out of this.

Lillian Karabaic:
All right. That wraps our show for today We love hearing from you. E-mail us your financial worries, your 529 successes at question@ohmydollar.com or tweet us at @anomalily or @ohmydollar. Our producer is Will Romey, our intro music is by Aaron Parecki, And your host and personal finance educator is me Lillian Karabaic.

Lillian Karabaic:
Thanks for listening and till next time remember to manage your money, so it doesn’t manage you.

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