you cannot move money from a savings vehicle where you contributed non-taxable dollars to one which accepts only taxable contributions.
you'll need to withdraw the money from the 401k, pay taxes and then on top of that 10% penalty because a 529 contribution is not a hardship withdrawal.
if you plan to use the 401k ultimately for the college money regardless if you need to pay taxes, then you should leave the money in the 401k as it is a better savings vehicle - because it is with tax-free money and it is already there. there is no sense in taking the money out now, paying taxes and penalty simply to move into another savings vehicle - you will immediately have less investment dollars - probably about 30% to 40% less after penalty/taxes. since the money is already growing tax free, leave it there, use a similar investment option within the plan, and then when it is time to use the money for college, then take the money out. putting it to use for college tuition does qualify for a hardship withdrawal by IRS rules - so you would only have to pay taxes at that time years from now and no penalty. additionally, with money you contribute to your 401k, I assume you're getting some type of matching contribution from your employer? you cannot do better than this with a 529 - you are getting tax-free contributions, and additionally an employer match - which in itself is most likely more than the return you could expect from any 529. if you get a dollar for dollar match (or even one for two match) that is 100% (or 50%) immediate return on your investment. again, there is no 529 that can match that - and be investing with before tax money.
in the mean time, you have more money invested in the 401k which can compound tax free earnings.
you can always start a 529 with after tax money without tapping the 401k.
lastly, many folks here would argue that you should not raid retirement savings for college tuition/savings purposes. you have the opportunity to get financial aid for college costs, you don't have that ability for retirement savings.
[This message has been edited by rsinj (edited December 24, 2004).]