Best Times for Parents to Contribute to their Child’s 529 College Savings Plan
The 529 plan—also known as the "qualified tuition plan"—is a government-sponsored tax-advantaged savings plan geared towards assisting parents prepare for their children's education expenses. Different states have different benefits, ranging from tax exemption (529 plan earnings are not taxable) to scholarship grants. This is why a lot of parents focus their financial energies on the 529, no matter how difficult it is to include the regular contributions in their monthly family budget. But timing is crucial. There are particular situations within which extra contributions become much more beneficial. Consider the following scenarios:
The Birth of a Child
During this period, friends and family members will want to give gifts to the new baby. Instead of asking for a new stroller, the parents can announce the start of the child's 529 plan and get donations in lieu of gifts. In fact, this can be said for all milestones in the child's life; grandparents and extended family might want to contribute to the plan instead of giving gifts on birthdays, holidays, and graduation. Plus, the earlier you start on the 529 plan, the better the earnings will be.
When a Child Receives His or Her First Money Gift
One thing about the 529 plan is that it would be wonderful if the parents and the child are all involved in the process. It helps the child get into the spirit of saving up for education and becomes more invested in the system. It doesn't just have to be cash gifts. Prizes from contests and other windfall should also be included. As a bonus, the parents should try to match the child's contribution.
The Arrival of the Annual Holiday Bonus
In the 4th quarter of 2012, approximately 72% of US employers announced the return of the holiday bonus—a notable increase from 2010's recession-related 53%. Parents should hold off from using their bonuses for a new appliance or device; it's a good idea to use this windfall on a 529 extra contribution since the money isn't earmarked for other home expenses.
The Annual Tax Refund
Not sure how to spend your tax refund this year? Well, here's another windfall that could be used to fund the child's 529 plan. However, do be sure that the money from the refund isn't earmarked for something else urgent, like home repairs or debt repayment. It's also possible to take just a small portion (10-15%, for example) of the refund as extra 529 contributions.
Receipt of Investment Earnings
2011 marked the lowest point in the United States' personal investment average since 1999. Only 54% of Americans invested in stocks, mutual funds, or even a 401k. Those who do have investments can expect year-end dividends, however, no matter how small. These year-end dividends can be used as contributions to a 529 plan. Remember: if you want to turn to investing to cover the skyrocketing costs of college, carefully evaluate your financial situation before putting your money anywhere.
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