"It is best to start the college investment process when your children or grandchildren are young, but it's never too late to begin. The earlier you start, the greater the potential impact compounding has on your savings," opines Lawrence Simon, principal with Margolis & Company in Bala Cynwyd, Pa. With that in mind, Randi Grant, director of taxation and personal financial planning with Berkowitz Dick Pollack & Brant in its Fort Lauderdale, Fla., office, offers a caveat. "Before determining what funding vehicle to choose, there should be a clear understanding of the parents' expectations and goals for their children's education, as well as a current assessment of the clients' current financial plan." THE FUNDING VEHICLE CHOICE

To decide on what funding vehicles should be used, Peri Ann Aptaker, principal and director of tax services at KLR (Kahn, Litwin, Rensa & Co.) in Providence, R.I., looks at the age and number of children, age and health of the parents, parents' and children's income and assets, and other funding sources, such as from grandparents or expected inheritances. Simon advises before selecting an option ask: What are the tax benefits? Who controls the funds? How much risk is involved? Are there contribution limits? Gloria Birnkrant, partner at NSBN in Beverly Hills, Calif., adds also to consider whether the client wants to manage the funds.

Alan Goldfarb, chief financial strategist at Weaver and Tidwell Financial Advisors, in Dallas, says, "There are many vehicles that can be used to fund these educational expenses, including 529 plans, UGTMA plans, 2503(c) trusts, Coverdell IRAs, and parental assets."

Robin Byford, a registered principal with the Financial Institutions Division of Raymond James financial services in Oklahoma City, typically finds that 529 plans are best suited due to the tax-free growth. She points out that Coverdell savings accounts have a much lower contribution limit per year, and that UGMA/UTMA accounts have other tax consequences on earnings, as well as a loss of control upon the beneficiary reaching majority.

Simon identifies the following distinct advantages of 529 plans:

1. Earnings used for qualified higher education expenses are free from federal taxes.
2. Parent in control of the funds.
3. Generous contribution limits are available regardless of income level.
4. Ability to select among the investment strategies available.
5. Child may pick any accredited college, university, or vocational school.
6. Unused portion may be transferred to another family member.
7. Contributions are excluded from a taxable estate, and may not be subject to gift taxes.
8. In certain states, earnings used for qualified higher education are free from state taxes.

Dale Baumann, principal with Windham Brannon, in Atlanta, points out that every state has established at least one Section 529 plan, with each establishing maximum contributions and some allowing income tax deductions.

As to Coverdell accounts, Baumann points out that donors can contribute up to $2,000 in combined total for a single beneficiary during a calendar year. Similar to 529 plans, he explains, the contributions are non-deductible, and distributions of income earned on the assets of the account aren't subject to income tax if they are used to pay for qualified expenses. He does add that an individual's ability to contribute to a Coverdell account is phased out if the individual is at a certain level of income.

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