Your goal, at a fundamental level, is to maximize your money. Money is fungible, meaning that it doesn't really matter if it is in a 529 plan or a retirement plan. If you have more money in your retirement plan, then you'll feel more comfortable spending current income on college costs. Likewise, if you have more money in your 529 college savings plans there will be less pressure on your income during and after the college years, so you'll be able to save more for retirement.

So you should take steps that maximize your total return on investment. As Dave says, if your employer provides a matching contribution, maximize the match. If your state 529 college savings plan provides for a state income tax deduction on contributions to the state 529 college savings plan, take advantage of that too.

I discuss this in more depth in FinAid's Saving for College section.

I have a few comments on Dave's response:

- Don't count on taking a distribution from your retirement plan to pay for college expenses. Although you can avoid the 10% tax penalty, you will still have to pay regular income tax on the distribution. In addition, the distribution will be included in your adjusted gross income and so affect your aid eligibility next year. It just isn't financially worthwhile.

- There are ways to finance a retirement, such as reverse mortgages. While it is true that there are a variety of ways to pay for college, saving for college increases your options and maximizes choice.

- In a worst case scenario, money in a 529 college savings plan will reduce aid eligibility by 5.64%. However, less than 7% of dependent students have any contribution from parent assets. This is because money in retirement plans, life insurance plans, the principal place of residence and small businesses owned and controlled by the family are not counted, and the first $40,000 to $50,000 of other assets for the typical family are excluded. After that the parent assets are assessed using a bracketed system with a top bracket of 5.64%.

- Most 529 college savings plans have deliberately few investment options. This is partly because 529 college savings plans are long-term investments where broad-based market indexes are sufficient. Most mutual funds do not beat the return on investment from the S&P 500, so why even bother? It is better to invest in a broad-based market index that is managed to minimize costs than to bet on a particular fund manager beating the market as a whole.

So I'd argue that you should first look at your investment options and spread the savings across the options in a way that maximizes your total return on investment. For example, if your employer does not offer a match but you live in one of the 32 states that provide a state income tax deduction for contributions to the state's 529 plan, you should invest in the 529 plan first.