Kelli,  This must be incredibly hard for you.  Not only are you dealing with your own emotions in this decision but also trying to help your five year old with it too.  Most of what I've read about talking to kids about hard topics (divorce, death, etc) says that being honest is the best policy but I really don't know if that holds true in a situation like this.  

One thing to remember is that kids this age are still very self centered so he's going to apply anything you say to himself.  For example if you try to explain that you're giving the baby to another family because you aren't able to take care of her, he's very likely to worry that you can't take care of him either and that you may give him to another family.  

Are you working through an agency to facilitate the adoption?  I wonder if they have resources (a counselor?) who might be able to help you with this.  I found an organization that might be able to help you:  http://www.adoptionsupport.org/about/index.php  Their website says that they offer free counseling to families involved with adoptions.  If your agency can't help you, maybe these folks can.

Good luck Kelli!

Kat

Just tell him gradually that you can not keep another child. And this choice is the best thing. Then say "would you like to give up your education. And become a HILL BILLY."
 Then just to make it fare say we will have a all about you.
Just the number one thing to keep in mind he is a five year old child.
Not a voodoo doll