Education IRA - This is an IRA that allows $500 per beneficiary, per year to be contributed after-tax for college expenses. When funds are withdrawn to pay college expenses, the withdrawals are tax-free. Contributions to an Education IRA are phased out completely when you reach $160,000 in AGI. In the event your income exceeds $160,000, grandparents or other relatives (uncles, aunts) can contribute to this fund.

Hope Scholarship Credit - This is a non-refundable tax credit valued at $1,500 for each child available to taxpayers filing joint returns with an Adjusted Gross Income (AGI) of less than $80,000 (phased out at $100,000). In the year you pay $1,000 or more of college expenses, you receive a $1,000 tax credit. In the second year you pay $1,000 or more of college expenses, you receive a $1,000 x 50% = $500 tax credit. This credit is indexed for inflation starting after 2001.

Lifetime Learning Credit - This is a non-refundable tax credit valued at $5,000 x 20% = $1,000 for each taxpayer. The same AGI restrictions apply and this credit increases to $10,000 x 20% = $2,000 for each taxpayer after 2002. This credit is available for an unlimited number of years as long as the child is enrolled at least part-time in an eligible institution.

* NOTE: Neither the Hope Scholarship nor Lifetime Learning Credits are available in the year funds are withdrawn from an Education IRA.

There are many exceptions to these basic rules outlined above so you should consult a fee-only financial planner before taking any action to determine which alternative is best for your unique situation.