SIE Ready🏙️ Municipal Securities · Lesson 4 of 5 · 6 min
529s, ABLE Accounts and LGIPs
🎓 A 529 plan looks like a menu of mutual funds, yet it is a municipal security. That one fact puts it under MSRB rules.
💡 Key idea
529s, ABLE accounts and LGIPs are municipal fund securities, so dealers selling them follow MSRB rules.
🧠 Why it matters
MSRB Rule D-12: a MUNICIPAL FUND SECURITY is a municipal security that would be an investment company except for the '40 Act's government exemption. Examples: 529 savings plans, ABLE programs, LGIPs (local government investment pools, for public entities' cash). 529 plans: SAVINGS plans invest (not state-guaranteed); PREPAID plans lock in future tuition, typically at in-state public schools. Contributions get no federal deduction; earnings are tax-free for qualified expenses, including up to $20,000 a year of K-12 expenses from 2026 (was $10,000). Nonqualified withdrawals: earnings taxed plus a 10% penalty. Leftovers may move to the beneficiary's Roth IRA: $35,000 lifetime, account open 15+ years. ABLE: disability onset before age 46 since Jan 1, 2026 (was 26); 2026 annual limit $20,000.
📈 In the real world
👩👦 Ms. Laurent opens a 529 savings plan for her nephew. Her rep explains she gets no federal deduction, though her state may give one for its own plan. Years later the nephew wins a scholarship and finishes college with $12,000 left. Because the account has been open over 15 years, part can roll to his Roth IRA, within the annual Roth limit.
📌 Takeaways
- Municipal fund securities: 529 plans, ABLE accounts, LGIPs (MSRB D-12)
- 529: no federal deduction; tax-free growth for qualified expenses; K-12 up to $20,000/yr from 2026
- ABLE: onset before 46 from 2026; 2026 contribution limit $20,000
📖 Terms in this lesson
529 plan: A state-sponsored education plan whose earnings grow tax-deferred and come out federally tax-free when spent on qualified education expenses.
ABLE account: A state-sponsored, tax-advantaged savings account for qualified disability expenses of an eligible individual, sold as a municipal fund security.
Local government investment pool (LGIP): A state-run pool where local governments invest cash, classed as a municipal fund security.
✅ Test yourself
Which product is a municipal fund security?
- A closed-end municipal bond fund
- A state's general obligation bond
- An interest in a 529 savings plan
- A city's tax anticipation note
Answer: C · An interest in a 529 savings plan
A 529 savings plan interest is a municipal security that would otherwise be an investment company, which is the D-12 definition. GO bonds and TANs are ordinary municipal debt. A closed-end muni bond fund is a registered investment company, not a municipal fund security.
Earnings in a 529 plan are withdrawn for a nonqualified purpose (no exception applies). How are the earnings treated federally?
- Taxed as long-term capital gains only
- Subject only to a 10% penalty, no income tax
- Tax-free because contributions were after-tax
- Taxed as income plus a 10% additional tax
Answer: D · Taxed as income plus a 10% additional tax
For a nonqualified withdrawal, the earnings portion is taxable income and generally carries a 10% additional federal tax. Contributions come back tax-free because they were made with after-tax money, but earnings do not. It is not capital-gain treatment.
Starting January 1, 2026, an individual can open an ABLE account if the disability began before what age?
- Age 46
- Age 26
- Age 59½
- Age 65
Answer: A · Age 46
Federal law raised the age-of-onset limit from before 26 to before 46 effective January 1, 2026. Age 26 was the old limit. 59½ and 65 relate to retirement-account and Medicare rules, not ABLE eligibility.
SIE-style questions, XP and streaks in the app. No sign-up needed.