Section 6.1: Municipal Fund Securities

  • These securities are created by federal law but sponsored by individual states, making them a type of municipal security subject to Municipal Securities Rulemaking Board (MSRB) rules.

  • Main Types of Municipal Fund Securities

    • Section 529 Plans

    • Local Government Investment Pools (LGIPs)

    • ABLE Accounts (Achieving a Better Life Experience)

    • All three are funds consisting of portfolios of other securities.
      However, Section 529 plans are unique because they are education savings programs for individuals.

1. Section 529 Plans:

  • A 529 Plan is an education savings account that allows investors to save for qualified education expenses for K–12 and college/post-secondary education.

  • Qualified Expenses

    • Tuition (up to $10,000 per year for K–12)

    • Room & board, books, supplies, and fees for post-secondary education

  1. Because these plans are state-sponsored, they are defined as municipal fund securities.

Common Features of Both 529 Plans:

  • Aggregate (overall) max contribution varies by state

  • No annual contribution limit

  • Gift tax rules apply, but donors can “front-load” 5 years of gifts at once

  • Donor retains control of assets (even after beneficiary becomes legal adult)

  • Tax benefits:

    • Funds grow tax-free

    • Withdrawals tax-free if used for qualified education expenses

  • No income limits for contributors

  • Rollover to another state’s plan allowed once every 12 months

  • Unused balances can be transferred to a related beneficiary

Types of 529 Plans

Feature / Prepaid Tuition Plan / College Saving Plan

  • Who Can Invest / State residents only / Residents and non-residents

  • Purpose / Lock in current tuition rates for future college expenses / Save and invest funds for education costs

  • Investment Risk / Low – state bears tuition inflation risk  / Higher – investor bears market risk

  • Growth Type / Value increases as tuition rises / Growth depends on investment performance

  • Flexibility / Limited – must attend in-state schools / More flexible – can use at most accredited schools

  • Popularity / Less common / More popular option

2. Local Government Investment Pools (LGIPs):

  • LGIPs are created by state governments to provide short-term investment vehicles for:

    • Cities

    • Counties

    • School districts

    • Other local government entities

  • Structure & Operation

    • Usually formed as a trust

    • Municipalities purchase shares or units in the LGIP’s portfolio

    • May maintain a stable $1.00 NAV (similar to a money market fund)

    • Facilitates liquidity and low price volatility

  • Regulation

    • Not required to register with the SEC

    • Not subject to SEC regulation

    • Instead, governed by state guidelines

    • Disclosure documents (not prospectuses) are provided, including:

      • Information statement

      • Investment policies and procedures

      • Fee disclosures

  • Key Points

    • Investors are government entities, not retail investors

    • Considered municipal securities

    • Oversight and rules vary by state

MSRB

〰️

MSRB 〰️

3. ABLE Accounts (Achieving a Better Life Experience):

  • Created by the ABLE Act of 2014, these are tax-advantaged savings accounts for individuals with disabilities and their families.

  • Eligibility

    • Onset of disability must have occurred before age 26

    • Beneficiary may be older than 26, as long as the disability began before 26

    • If the individual receives SSI (Supplemental Security Income) or SSDI, they are automatically eligible

    Account Features

    • Beneficiary is the account owner

    • Only one ABLE account per person

    • Contributions:

      • Made with after-tax dollars

      • Anyone (beneficiary, family, or friends) may contribute

      • Not tax-deductible federally, though some states offer deductions

    • Annual maximum contribution applies (adjusted for inflation)

    • Earnings grow tax-deferred

    • Withdrawals are tax-free if used for qualified disability expenses

    Key Notes

    • Income earned in the account is not taxed

    • Tax-deferred growth + tax-free withdrawals

    • State rules may differ slightly regarding tax deductions

Next Section

✺ Review questions ✺

  • A. SEC
    B. FINRA
    C. MSRB
    D. FDIC
    ➡️ Answer: C – They fall under the Municipal Securities Rulemaking Board (MSRB).

  • A prepaid plan locks in current tuition rates, while a savings plan invests funds in a market portfolio that grows with investment performance.

  • Once every 12 months

  • Local government entities such as cities or school districts — not individual investors.

  • False – They are exempt from SEC registration and instead provide disclosure documents.

  • The disability must have occurred before age 26, but the person can be older when opening the account.

  • Tax-deferred growth and tax-free withdrawals for qualified expenses.