Municipal Fund Securities

The whole unit on one sheet: three products, who they serve, and the tax and control rules the exam loves.

Core Concepts

• Municipal fund securities: pooled programs (shares or units), NOT municipal bonds and NOT debt. Defined and regulated by the MSRB; exempt from Securities and Exchange Commission (SEC) registration, but the dealers who sell them still follow MSRB rules.
• Three product types: 529 plans (education, individuals), ABLE accounts (disability, eligible individuals), LGIPs (short-term cash, government entities only). All three share the same MSRB classification.
• 529 savings plan: mutual-fund-like portfolios, value fluctuates, usable at any eligible school nationwide, age-based portfolios rebalance automatically.
• 529 prepaid tuition plan: locks in current tuition, guaranteed by the sponsoring state (not FDIC or SIPC), tuition and mandatory fees only, mostly in-state public schools.
• ABLE account: supplements (does not replace) government benefits; the beneficiary is the account owner; one account per individual; openable in any state.
• LGIP: money-market-like, run by the state treasurer; government entities only, never retail.
• Owner vs. beneficiary (529): the owner controls everything and retains ownership; the beneficiary has no control and does not own the assets.

The One-Liners That Win Points

• Municipal fund security = pooled program, NOT a bond.
• If the exam asks who regulates these products, the answer is the MSRB.
• MSRB regulates the dealers, not the issuers; FINRA and the SEC enforce.
• MSRB only regulates adviser-sold plans, not direct-sold plans (no dealer involved).
• 529 contributions are revocable; UGMA/UTMA custodial gifts are irrevocable and belong to the minor at majority.
• Prepaid plan = state-guaranteed; savings plan = market risk.
• SSI is suspended, not terminated above the balance threshold; lifetime Medicaid is unaffected.

Numbers to Lock In

529 Tax Treatment

• Contributions: after-tax dollars, no federal deduction; no income limits and no age limits (unlike Coverdell Education Savings Accounts (ESAs)).
• Growth is tax-deferred; qualified withdrawals are tax-free.
• Non-qualified: contributions return tax-free; earnings hit with ordinary income tax + 10% penalty.
• Penalty waived (income tax on earnings still owed) for: scholarship, U.S. military academy, death, disability.
• 529-to-Roth IRA rollover: 15-year account age, 5-year contribution seasoning, annual Roth limit, $35,000 lifetime cap, Roth owner must be the beneficiary, direct trustee-to-trustee; normal Roth income limits do NOT apply.

Top Gotchas

• 529 savings plans are NOT guaranteed. Only prepaid plans carry a state guarantee.
• The 10% penalty applies to earnings only, never the whole withdrawal.
• Superfunding locks out additional gifts to that beneficiary for the full 5 years.
• Changing the beneficiary to a non-family member triggers tax consequences.
• The beneficiary does not own the 529 assets, even past age of majority (opposite of UGMA/UTMA).
• Direct-sold plans: MSRB rules do not apply; dealers must disclose that lower-cost direct-sold plans may exist.
• Medicaid payback at death covers only benefits paid after the ABLE account opened, and only Medicaid (not SSI or SNAP).
• "Stable NAV" LGIP aims for $1.00 per share but is not guaranteed or FDIC-insured.

One-Breath Recap

Three MSRB products, one category: 529 plans for education, ABLE accounts for disability, LGIPs for government cash. Owner controls the 529, penalties hit earnings only, and the tax and guarantee boundaries answer most of the questions.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Municipal Fund Securities unit for the complete lesson.