The 2003 tax law changes lowered the maximum long-term capital gains tax and
dividend tax. How would these changes affect saving for college? In this article,
the author presents some numerical analysis that compares saving with a 529
plan, Coverdell, UGMA, and taxable mutual fund, in light of the recent tax law
changes. The analysis shows that the 2003 tax law changes have made UGMAs and
taxable mutual funds more attractive than before. However, in most cases considered
in this analysis, 529 plans and Coverdells are still better suited for saving
for college because of the tax-free treatment on earnings. The 529 plans become
even more appealing when contributions are deductible from state income taxes.
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