This page of our SIE Study Guide covers municipal fund securities such as 529 plans, local government investment pools, and ABLE accounts.
Firms that provide municipal advisory services or that engage in municipal securities business are required to register with both the SEC and the Municipal Securities Rulemaking Board (MSRB). Their registered representatives must also be properly qualified by passing the appropriate examinations. Just like other broker-dealers, municipal securities broker-dealers are subject to SEC and MSRB rules including fair dealing, suitability, disclosures, pricing, supervision, and more.
529 College Savings Plans
Many families take advantage of 529 college savings plans to save up for qualified postsecondary educational expenses like college tuition, textbooks, and more. These plans are technically referred to as municipal securities by the SEC since they are created and sponsored by each state. 529 plans can be advisor-sold or direct-sold and account owners are allowed to make changes to their investments twice per year.
- Advisor-Sold Plans: Offered through a registered broker-dealer or RIA. These plans generally have better portfolio flexibility than direct-sold plans but also carry higher fees. Brokers, for example, typically charge commissions on any investment product sales.
- Direct-Sold Plans: Offered directly from the state that sponsors the plan. These plans generally have fixed portfolios and carry lower fees.
529 plans are popular for their tax benefits since account earnings grow federally tax-free, meaning the earnings are not treated as taxable income. Taxes don’t have to be paid on the investment income or capital gains and withdrawals can be made from the account tax-free, so long as they are used for qualified postsecondary educational expenses.
Additionally, over 30 states currently offer full or partial tax deductions or credits for 529 plan contributions. In New York, for example, married couples filing jointly can deduct up to $10,000 of contributions from taxable income per year and single filers can deduct up to $5,000 per year.
Achieving a Better Life Experience (ABLE) Accounts
Also known as 529 A accounts, ABLE accounts are municipal fund securities that allow Americans with disabilities to save up to $15,000 for disability-related expenses each year. Similar to 529 plans, ABLE accounts are created by states and offer different investment options like mutual funds or money market funds which may be changed twice per year. When used for qualified disability-related expenses, like transportation or healthcare expenses, withdrawals can be made from the account tax-free.
- In order to hold an ABLE account, individuals must either (1) already receive Supplemental Security Income (SSI) and/or Social Security Disability Insurance (SSDI) or (2) have a documented diagnosis of blindness or other disability prior to the age of 26.
- A parent, guardian, or individual with power of attorney can open an ABLE account on behalf of a beneficiary. Additionally, contributions to the account can be made post-tax by any person, though they are not tax deductible.
- States generally charge a monthly maintenance fee on ABLE accounts which will vary across states. Some plans may require a minimum contribution limit.
Local Government Investment Pools (LGIPs)
LGIPs are investment vehicles established by state governments. They pool the resources of different local governmental entities, such as cities, counties, or school districts, and then invest in short-term securities to achieve certain objectives like liquidity or return on investment (ROI). LGIPs are exempt from SEC registration and can be sponsored by (1) a state or local government or (2) several cities and counties joined together under a joint power agreement, depending on the state’s laws.
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