AS NEWLYWEDS, MY HUSBAND AND I HAVE BEEN socializing a lot with the ethnic Indian population in San Francisco. Slowly, word got around that I'm in the financial services industry, and now young parents constantly approach me with questions concerning “investment ideas for education purposes.”

My advice is always the same - “Start saving early.”

While paying for education has gotten more costly than ever, saving has become relatively much easier. There are a couple of alternatives available that offer valuable tax saving incentives for education-funding purposes. Which alternative works best for you, would require a meeting with your financial advisor for more personalized advice.

College education in this country can be very expensive. According to The College Board, for the 2001-2002 school year, college costs approximately $120,000 for four years at a private school and $55,000 for a public school. If you have a newly born child you have to consider inflation and the fact that college tuition is increasing each year. The total cost of college education for a one year old can be daunting to many.

One tax savings alternative for college education planning is the 529 Savings Plan. This plan allows you to make regular contributions to the account, subject to state annual and total contribution limits. The investment earnings in the plan grow federal tax free. (These tax benefits are effective through 2010 unless extended by Congress. ) When the time comes for your child to go to college, one can withdraw from it as needed to pay for higher education expenses.

Right now, you're probably thinking what a help this is to pay for tuition expenses, but what about the rest of costs involved with going to school? More good news! The funds in the account can be used for other expenses including: living expenses, books, computer, equipment, and supplies. The earnings portion of the distribution is exempt from federal taxation as long as the distribution is used for qualified education expenses. Students are limited to accredited schools, which may include trade programs offered at culinary and vocational institutes.

Should you be the proud parents of a child who is granted a scholarship, the funds can be withdrawn without penalty up to the amount of the scholarship. Another option is transferring the funds to another family member who is headed for college, with no penalty to you. If the investment is not used at all, you can withdraw all the funds. However, the earnings portion of any distribution not used for qualified higher education expenses will be included as ordinary income to the person receiving the distribution and subject to a 10% penalty on the federal level. There may also be a penalty assessed on the state level and may actually differ from not only the federal penalty, but also from state to state.

There are even more advantages to this program as contributions are considered completed gifts for gift tax purposes. This means your contributions could qualify for the $11,000 annual gift tax exclusion. A special exception to the $11,000 annual exclusion allows you to make as much as a $55,000 contribution in one year ($110,000 for married couples filing jointly) on behalf of a beneficiary. The $55,000/$110,000 contribution is, in effect, treated as five separate $11,000/$22,000 annual exclusion gifts (one for the current year, then one in each of the next four years). No federal gift tax will result as long as no other gifts are made to this beneficiary within the same five-year period. If you were to die during this five-year period, however, a portion of this gift would be included in your estate.

Talk to your Financial Advisor about the potential benefits this 529 program has to offer. Consult your legal or tax advisor to understand that particular tax consequences associated with your opening a 529 Plan account. Your Financial Advisor can then assist you in conducting the necessary analysis to determine which education-funding strategies would benefit your unique situation.