I'm a piano teacher and answer this question all the time. My favorite keyboards are the Yamaha YPG 535 - http://www.amazon.com/Yamaha-Portable-Graded-Action-Keybo...
Keyboards such as these don't have a long shelf life. It's actually better to start with a used upright piano - IF - it's a good one. If all the keys work properly, it's a slightly bigger upright - usually the spinets don't sound very good and don't have a very good bass. I would rather see a student with a good digital piano than a bad upright.
The Yamaha Arius - I've seen is very good as well - this again is a digital piano.
I've also seen some VERY reasonably priced Kohler and Campbells at Pedigo piano. If you are thinking down the road of an upright piano - then it's better to invest in either renting a good one or buying one right away rather than tossing your money on a keyboard. Most stores will apply the rental price to the piano, should you decide to buy it, or if you decide on a different one than you rented at the store, they will even apply the purchase price there.
If your $500 piano happens to be a good one (use a technician to find out) then, I would recommend going with that.
If you buy a keyboard, make sure it's 88 key and weighted. I also insist that my students have pedals coming with the keyboard, because we use pedals even in the very beginning. The piano teacher should know what it is your child is playing on. Yes, my students notice when their instrument is not as good at home as it is in the studio. My digital piano is first class, and so is my piano. If their instrument at home is bad, they won't want to practice. You have to make sure EVERY key works properly, and pedals, and seating is proper, or it takes away from the child's learning experience.
Another thing to consider - pianos hold their value. My piano is worth $20,000, built in 1971 and will never go down in value. I spent $5500 on my digital piano in 1992 and it's worth NOTHING today.
Also, check out MYC.com for a teacher in your area - they have group keyboard lessons for children your son's age! In my opinion they are the best early child music program ever developed - beats Kindermusik and Musikgarten.