"I used a workplace bonus to finish paying off my oldest son's prepaid tuition plan," says Lisa Featherngill, referencing a type of 529 plan that pays for a set amount of college tuition in advance. With those payments out of the way, the North Carolina-based personal financial specialist now funds an additional 529 plan to cover her oldest son's room and board expenses, as well as a plan for her second child.
[Find out if prepaid college tuition plans are right for you.]
Parents trying to determine the best times to make extra contributions to 529 plans should consider these five circumstances.
1. Tax refunds: Parents may receive their tax refund as early as January, but Featherngill cautions anyone from depositing the full amount into 529 plans. "First, parents should make sure the money they get back isn't needed for regular living expenses," she suggests. "You'd hate to go into debt to contribute to your child's 529 plan."
Instead, contribute an affordable percentage of tax refunds, she says. According to the IRS website, the average tax refund in 2011 was $2,913. Ten percent, $291, contributed annually to a 529 plan account for 15 years equals $4,365 of college savings, without factoring in interest or investment earnings.
2. Workplace bonuses: Holiday bonuses are great for 529 plan funding because they're generally not counted on for living expenses, Featherngill says. However, parents should be more careful with bonuses that are distributed throughout the year that are needed for monthly bills, she notes.
For prepaid tuition accounts, only contribute bonus money if the cash deposited will pay the balance off, or the interest rate on the prepaid tuition plan is higher than other debt a parent has, she suggests. Unlike other 529 plan accounts, prepaid tuition plans are generally billed on a regular basis until the tuition within the plan is completely paid off, regardless of whether you've made extra payments.
[Avoid these myths about prepaid tuition accounts.]
3. Credit union or mutual fund dividend payouts: A parent's credit union may pay year-end dividends (shares of profit sent to members or investors) of a few dollars simply for having an account, Featherngill says. Typically, mutual funds pay year-end dividends, too. An investment of $5,000 in mutual funds might produce a $300 dividend check, she notes.
"However, if parents want to deposit their mutual fund dividends in a 529 plan, it's important they don't select an option to automatically reinvest dividends into buying more shares," she says. Instead, select the option for payout dividends, generally distributed once per year.
4. Student contests: An 8-year-old Utah Educational Savings Plan (UESP) customer won $600 in a writing contest. She put the money straight into her 529 plan, along with a $600 match from her parents, who continue to match any dollar amount she contributes.
"Contributing to their own 529 plan helps kids feel invested in their own education," says Lynne Ward, executive director of UESP. Other student contests that can lead to cash prizes—and additional college savings—include science fairs and spelling bees.
[See the costly mistakes parents make when saving for college.]