Before the new act was passed, there was little contest between the two. You could only save $500 a year in an education IRA -- often not enough to buy a year's worth of college textbooks -- while parents could invest as much as $100,000 in a single year in some 529 plan under certain circumstances. But the new rules strengthen the education IRA (now called the education savings account, or ESA). Here are some considerations when weighing which vehicle might work best for you.

Beginning in 2002, the annual contribution per ESA beneficiary (the child who will be going to school) has been raised to $2,000 a year, and contributions can be made as late as April 15 following the tax year. For families expecting to send their children to an expensive college, $2,000 a year won't be enough, even with tax-free earnings, so the 529 savings plan will likely be the better alternative. However, for families expecting to fund a more modest education, or who simply don't have the income to invest more than $2,000 a year (many planners recommend that parents make saving for retirement a priority over funding college), the ESA may work well for them.

One major advantage the education savings account offers is that you control the investment decisions, as much as you can in any IRA. With a 529 plan, investments are determined by the plan's managers, and consequently may be more aggressive, or more likely, more conservative, than for your needs. However, some investors may prefer not to make the investment decisions. Furthermore, the new law will allow participants to change 529 plans once a year without changing beneficiaries, and the IRS will even allow changing of accounts within a plan once a year. This will make it easier to switch to a plan with more suitable investments.

Another major, and controversial change, to ESAs is that you can now apply the account's earnings tax free to pay for qualified expenses at public and private elementary and secondary schools. This includes tuition, tutoring, room and board, and computer equipment.

The law also raised the adjusted gross income phase-out range for joint filers donating to ESAs. You can contribute the maximum $2,000 a year as long as your AGI doesn't exceed $190,000. That amount begins to phase out above $190,000, and married taxpayers who earn $220,000 or more can't contribute at all. While this is an improvement, 529 plans still have no income restrictions, which make them more attractive to high-income taxpayers.

You'll now be able to contribute to both education savings accounts and 529 plans in the same year, without triggering an excise tax on "excess" contributions. This will allow you to choose different plans for different children, or simply sock away more for a single child. You'll also be able to make tax-free withdrawals from an ESA in the same year you claim the Hope or Lifetime Learning tax credits, as long as the withdrawals are not used to cover the same expenses for which you are claiming the credits.

But drawbacks remain for education savings accounts when stacked up against 529 plans. One of the biggest is that ESAs are custodial accounts -- that is, the assets in the account are treated as belonging to the beneficiary, even though the parent or other "responsible person" controls the account. Although there is some movement to change this, colleges traditionally have counted the assets in a child's name more heavily than assets in a parent's name when calculating financial aid. Under 529 plans, parents own the assets, which helps from a financial aid standpoint, and gives the parents the flexibility to keep contributions and earnings (subject to tax and penalties) should the child not go to college.

Earnings grow tax free in both education savings accounts and 529 plans. However, roughly 20 states offer a state tax deduction for some or all of the contributions for a 529 plan, but they don't offer such a deduction for ESA contributions. There is no federal contribution deduction for either type of plan.