Virginia last week joined the growing parade of states that offer parents of college-bound children a tax-deferred way to save potentially very large sums for their higher-education expenses.

The new program is not restricted to Virginia residents, though it is slightly more advantageous for them.

The Virginia Education Savings Trust, or VEST, is an IRA-like savings vehicle that allows families--or anyone, for that matter--to put money into an investment account and see it grow tax-deferred until the beneficiary withdraws it for college.

These programs, sometimes called "529 plans" after the tax-code section authorizing them, were written into federal law with little fanfare in 1997.

They are often confused with the Education IRA, which came into being at the same time, and pre-paid tuition programs, which have been around longer. But 529s are more flexible and in some ways more generous than those programs, and several states have opened them, including New York and New Hampshire. Virginia is the first D.C.-area jurisdiction to start one.

With the VEST program, contributors may put in up to $100,000--perhaps enough to cover even an Ivy League education, given enough time and decent investment returns--and the proceeds can be used for higher-education expenses at any college in the country that is eligible to participate in federal student aid programs.

There are no residency requirements on either the contributors or the beneficiaries, nor are there any income limits. Proceeds can be used at public or private colleges in Virginia or elsewhere.

Virginians who contribute to a VEST account can take a deduction of up to $2,000 against their state income taxes (though Virginia's low tax rates mean the benefit of the deduction will be small). Nonresidents who have Virginia-source income and who have to file a Virginia return are also entitled to a deduction. Those who contribute more than $2,000 in one year can carry the excess forward and deduct it in future years.

"We've gotten a whole lot of interest," said Diana F. Cantor, executive director of the Virginia Higher Education Tuition Trust Fund, which operates both VEST and the Virginia Prepaid Education Program (VPEP). The latter program allows parents and others to buy contracts that guarantee to pay the full tuition and mandatory fees at Virginia public colleges.

Cantor said state officials see VEST as a natural supplement to VPEP, because VPEP is limited to tuition and doesn't cover room, board and other costs. But she said it also makes sense for families whose kids may prefer to go out of state or to a private college, since the prepaid contract, though it can be used for such schools, is unlikely to be enough to cover private or out-of-state college tuition.

Financial planners and other advisers said they find VEST appealing but caution that it has limitations that families should be aware of.

"I think it offers a great opportunity for people who like the discipline of planned saving and ability to get professionals to manage the money," said Elissa Buie of the Financial Planning Group in Falls Church.

At the same time, she and others noted that the investments in VEST accounts, as in other states, are geared to the age of the beneficiary and over time are shifted away from stocks and into fixed-income assets as the time for college grows nearer.

This may be less aggressive than some investors would like. Cantor said that since there are no guarantees with VEST, the state prefers to err on the side of caution, so that parents will not see their money evaporate in a market crash just as the child enters college.

VEST offers seven account types that start out with different asset mixes, ranging from 80 percent stocks to 100 percent fixed-income, but all move steadily toward all fixed-income over time. Presumably, the parents of younger children will choose the mostly stock account, but Cantor noted that they don't have to if stocks make them nervous.

Also, the transition to fixed-income is related to the age of the account, not the age of the child. Thus, a family could make additional accounts for the same child later on and put the new money in the stock-heavy option. There are fees, though: an $85 processing fee for the first account and then $25 for each additional account for the same beneficiary.

Under federal law, investors are barred from any active role in managing the account. Most states opt to contract with an investment manager to run the program--New York uses the Teachers Insurance and Annuity Association (TIAA), for example, while New Hampshire uses Fidelity Investments and Maine is using Merrill Lynch--but Virginia will operate the fund itself, using a variety of money managers.

Virginia officials feel they will be able to get excellent returns, but it may give pause to investors who take comfort in a strong track record--which managers such as TIAA and Fidelity can boast.

An important limitation is that only $2,500 a year from the VEST account may be used for off-campus room and board. This figure is specified in temporary Treasury Department regulations governing these programs, and Cantor acknowledged that it is "unrealistic, . . . almost laughable." She said virtually every state that has commented on the rules has called for higher limits and "we are hoping that when regulations are finalized, we will get some relief in that area."

The rules allow full payment for on-campus room and board.

VEST accounts are transferable and allow parents to require permission for withdrawals--an advantage for families who have concerns about the behavior of their offspring. But withdrawals for non-qualified expenses will trigger a 10 percent of earnings penalty as well as taxes.

Finally, these plans are so new it is not clear how they will be treated in financial aid calculations.

Families planning ahead for college should make sure they at least look at a VEST account, or one from another state, in mapping their strategy. Tax deferral, plus shifting of income to a lower-rate taxpayer (the child), is a powerful tool for boosting investment returns.

Information is available at 1-888-567-0540, or on the Internet at www.vpep.state.va.us (though this site was under construction last week). For comparison, www.nysaves.org provides information about New York's program, and Fidelity Investments and New York-based TIAA also have information.