First, learn a bit about 529s.
For most families, 529 college savings plans, which are sponsored by individual states, are the easiest way to save. You can open an account by making a contribution of as little as $25 per month. As with a Roth IRA, the money in your account grows tax-deferred. Once your child starts college, you can withdraw money tax-free to pay for tuition, room, board, books, and supplies at any accredited institution.
To sweeten the deal, 35 state 529 plans offer generous tax incentives. In New York, a couple can deduct up to $10,000 annually in contributions per household, which could save more than $600 in state taxes. While many states have a limit on tax deductibility, Colorado, South Carolina, West Virginia, and New Mexico have no cap. If you live in Arizona, Kansas, Missouri, Maine, or Pennsylvania, you'll get a tax break even if you choose to join another state's plan. A dozen states even match contributions for low- to moderate-income households; Arkansas families with an adjusted gross income below $60,000 and a child under age 7, for instance, may qualify for a $500 annual grant.
Another benefit: "The assets in a 529 have only a negligible effect on financial aid eligibility because they're treated as your assets, and not your child's," points out Joe Hurley, president of savingforcollege.com, a college guide for families.
Still, you should be aware of the potential 529 pitfalls. If your child doesn't attend college, you could be subject to income tax plus a 10 percent penalty on the earnings withdrawn. You'll also owe Uncle Sam if your child earns a full scholarship (we should all be so lucky). 529s also tend to offer fewer investment choices than IRAs, and you're generally limited to shifting the assets once a year. But for busy parents, that may not be the worst thing.