The 2003 tax act offers lower rates on investments, making 529 college savings plans less attractive. Nevertheless, 529 plans continue to offer advantages:
Zero tax is better than some tax. Qualified distributions from 529 plans remain tax-free. The new tax law reduces taxes on dividends and capital gains, but does not eliminate them.
Interest income and short-term capital gains coming from taxable investments are still treated as ordinary income and taxed at rates as high as 35 percent. You can find investments offering protection of principal and competitive interest rates in many 529 plans, without incurring any tax.
Many 529 plans provide state tax advantages. You may live in one of 24 states (or the District of Columbia) offering a state income tax deduction for 529 contributions. Other types of investments don”t provide that benefit.
Estate reduction remains a key benefit of 529 plans. No other vehicle allows an individual to remove assets from his or her gross estate, yet retain full ownership and control of those assets.