If you're looking for a simple way to start saving for your children's college education, check out state-sponsored savings plans. Twenty-three states currently offer these plans with 11 more set to open by the end of the year (visit www.collegesavings.org to see which ones) and at least 17 programs allow nonresidents to invest. Here's how they work: You send money to the state, which invests it in a combination of stocks, bonds, or mutual funds. Some states use well-known managers to run their accounts, like Fidelity (which runs programs for New Hampshire and Delaware) or TIAA-CREF (which invests the funds for several states, including California and New York). The minimum investments are typically $250 to $1,000, but most programs allow you to sign up with as little as $25 or $50 a month if you contribute automatically. In California, for example, it costs $25 to get started, and you can add just $15 a month. The funds you contribute are not deductible on your federal tax return (and just 10 states — Iowa, Maryland, Michigan, Mississippi, Missouri, Montana, New York, Utah, Virginia, and West Virginia — let you deduct a portion on your state return), but the money grows tax-deferred.

Funds withdrawn to pay for college are taxed at your child's presumably lower rate for federal tax purposes, and some states let you withdraw the funds tax-free. The money can be used for tuition and fees, room and board, and books. Unlike custodial accounts, you control how the funds are used, so there's no fear of your child taking out the money at age 18 and heading for a Porsche dealer.

There are some drawbacks, however. Your returns aren't guaranteed, and some states invest the money in such a conservative fashion that you can often do better investing on your own. Also, you can't take the money out for any purpose other than paying for higher education without incurring taxes (at your rate) and penalties. So if you become displeased with the fund's performance, you're stuck.

Another alternative is to put money into a separate IRA account of your own, then siphon off the necessary funds for your child's education. Financial planners say a Roth is better than the so-called Education IRA. After five years, you can tap your funds penalty-free — and tax-free if you're over age 59 1/2. You can invest more in a Roth than an Education IRA, which has an annual limit of $500, and there's no penalty if your child decides to forgo college. With an Education IRA, withdrawals for any purpose other than college are hit with a 10 percent penalty. You'll also make out better with financial aid since Roth assets are generally counted as your money, while an Education IRA is your child's. Financial aid formulas consider 35 percent of your child's assets available for tuition, but typically touch only 5.6 percent of yours.