Q: Like many people, I need to make my savings grow for both my retirement and my child's education expenses. What kinds of savings or investment vehicles can I use to increase my education savings?

A: It's important to work with a financial advisor who can examine your particular situation and help you find the most productive way to balance your savings for both retirement and education expenses. However, there are two useful savings vehicles that you should be sure to discuss with your advisor: Coverdell Education Savings Accounts (formerly and still commonly called Education IRAs) and 529 plans (named for Internal Revenue Code Section 529).

A Coverdell Education Savings Account (ESA) is a tax-sheltered account, opened on behalf of a child that is under age 18. As of 2002, you may contribute up to $2,000 each year to your account (up from $500 in previous years), with a contribution deadline of April 15 of the following calendar year. Your ESA advisor will help you to increase your account by investing your contributions in various ways. Your contributions are not tax deductible, but the withdrawals are tax-free if used for qualified expenses. Qualified expenses include many costs of an elementary, secondary, or college education (such as tuition, fees, tutoring, books, supplies, room and board, transportation, special needs, a computer system, educational software, and Internet access). Eligibility limits do apply. Your ability to participate in an ESA will be phased out for an adjusted gross income of $190,000 to $220,000 for joint filers and $95,000 and $110,000 for single filers. If you plan to use an ESA to fund a child's college expenses, be sure to consult with an advisor first. ESAs are more likely to benefit higher-income families with children who probably won't be eligible for financial aid. Lower- to middle- income families may lose more financial aid than they will save in taxes, because ESAs (which must be opened in the child's name) are counted as the child's assets and will likely reduce the amount of aid that he or she can obtain.

529 plans are state-sponsored accounts that support college education expenses and enjoy tax benefits at both the state and federal level. 529 plans come in two forms: a prepaid tuition plan and a savings plan. States may offer one or both plans. In a prepaid tuition plan, you purchase a chosen amount of tuition (in years or other units) at today's rates, by making either monthly installments or a one-time lump payment. The state will then pay for that same amount of future tuition at any of the state's participating colleges or universities. (Or, it may pay an equal amount for tuition at private and out-of-state institutions.) The savings plan offers a variable rate of return on the money you invest, with some states guaranteeing a minimum rate of return. All earnings are exempt from federal taxes. Tax benefits at the state level vary. Many states offer full or partial tax deductions for your contributions and full exemptions for your earnings.

The basic differences between ESAs and 529 plans are that ESAs are self-directed, so you decide where to purchase the ESA and who you will work with to help you invest your money. A 529 plan is more like a savings account, where the state takes the money and does the investing for you. ESAs generally have no state tax benefits, but some states may offer tax benefits for 529 plans. Also, ESAs can be used for primary and secondary education, but 529 plans are for higher education only. Finally, ESA funds may affect your child's eligibility for financial aid. As always, consult with your financial advisor to help you decide what is right for you and make the most of your savings dollars.