When it comes to grooming the next manager for your dairy, there's little doubt that a good education is one of the keys to success. However, with education expenses constantly increasing and the amount of financial aid available decreasing, the cost of college is becoming more of a financial burden.

Given the enormity of this expense, you can't begin to prepare too soon. And thanks to the latest legislation, you have more options from which to choose. Among them are the IRA's - education, traditional and Roth - and state-sponsored programs. Use the following to help decide which may be right for you and your family.

Section 529 savings plans
These state-sponsored plans allow you to invest more than ever before in a tax-advantaged program. Any U.S. resident can participate in the program. Withdrawals can be used at any eligible post-secondary school in the U.S., including public and private colleges and universities, community colleges and most vocational schools. As of Jan. 1, 2002, all of the earnings grow tax-free as long as the money is used for educational expenses.

State-sponsored savings plans also offer a unique opportunity for grandparents and other relatives to contribute up to $55,000 per child in one year without incurring gift taxes. These dollars are considered a completed gift, and removed from the donor's estate unless the donor dies within five years of the gift. If that should happen, a pro-rated portion of the original gift amount will revert back to the donor's taxable estate.

One of the added benefits of a 529 Savings Plan is that you can make contributions, or make withdrawals from both a 529 Savings Plan and an Education Savings Account (ESA) in the same year.

Education Savings Account (ESA)
Beginning in 2002, the maximum annual contribution to an ESA (formerly, the Education IRA) increases to $2,000 per child. Married taxpayers that file a joint tax return and have an adjusted gross income under $190,000 qualify to make the maximum contribution.

In addition to college or graduate school, ESA funds now can be used to pay for elementary through secondary school expenses as well. So, the ESA could be a smart investment vehicle if you plan to send your children to private grade school or high school. All earnings are exempt from federal, state and local tax, as long as the account is used to pay for qualified educational expenses.

Even if you send your children to public schools, you can still use an ESA to pay for certain out-of-pocket expenses. In addition to tuition, and room and board at public, private or religious schools, you also can use the tax-free distributions to purchase computer equipment, uniforms and transportation, extended-day programs, academic tutoring, books and supplies.

Traditional and Roth IRAs

With traditional IRAs, you can withdraw funds early - contributions and earnings - to pay higher education expenses without paying the 10 percent penalty. The downside is that you will still have to pay any regular income taxes on the amount withdrawn. So, the Education Savings Account is a better choice.

However, with a Roth IRA, if it has been established and funded for five years or more, you can withdraw the contributions made and use them for educational purposes before the age of 59 and a half, penalty-free. Any earnings you take out, again, will be subject to regular income tax.

Before you make any decision on how to finance your children's, grandchildren's or other relative's education, speak with your tax and financial advisers. They have information and experience that could help you plan for this important event and make it less of a financial burden.

David Chlus is a first vice president of investments with Smith Barney, Inc., in Utica, N.Y., and partner in a 90-cow dairy.