Municipal Fund Securities

529 College Savings Plans
Local Government Investment Pools

529 College Savings Plans

The information provided below is a general summary of some of the basic features of 529 college savings plans. These features may vary from state to state. For a more complete understanding of applicable federal and state tax laws and other program-specific features, please refer to Internal Revenue Code ("IRC") Section 529, the applicable state statutes and the program disclosure materials available from the states and their primary distributors.

Introduction:  529 college savings plans are established by states under IRC Section 529(b)(1)(A)(ii) as “qualified tuition programs” through which individuals make investments to accumulate savings for qualifying higher education costs of beneficiaries. Individuals purchase interests in a trust or other financial arrangement established by the state or its instrumentality, with the collective assets invested according to the plan’s stated investment objectives. Issuers typically engage investment management firms to manage the investment of assets. In addition, most states engage broker-dealers to serve as primary distributors for their 529 college savings plans. In many cases, primary distributors and/or the state instrumentalities enter into selling arrangements with other broker-dealers to serve as selling dealers to provide further channels for distributing the securities to customers.

State Programs:  A 529 college savings plan that meets the requirements of IRC Section 529 must be established and maintained by a state or an agency or instrumentality of a state. This governmental entity (not the investment management firm or primary distributor) is the issuer of any shares or interests purchased by customers. Virtually every state, as well as the District of Columbia, has a 529 college savings plan. Although these plans all share certain common elements required under IRC Section 529, many features may vary from state to state. Such features include state tax law treatment, who may invest in a plan and the types of investments available, among many others.

Investment Risk:  Investments in 529 college savings plans involve investment risks.  Although plans are established and maintained by states, the states do not provide guarantees against investment loss, except in certain very limited cases.  As with any investment in a mutual fund or other equity security, an investment in a 529 college savings plan can decrease in value.  Furthermore, although the past performance of available investment options in a 529 college savings plan may be one of several appropriate factors to consider in choosing an investment, such past performance is not necessarily indicative of how a particular investment vehicle will perform in the future.

Application of Federal Securities Laws: Although most 529 college savings plans have been modeled after mutual funds or "funds of funds," they are not subject to regulation under the Investment Company Act. In particular, in structuring a 529 college savings plan, an issuer is not required to meet the basic requirements set forth in the Investment Company Act. The requirements from which a state is exempted include, among other things, registration with the Securities and Exchange Commission ("SEC"), preparation of a prospectus and statement of additional information (SAI), daily calculation of net asset value, and establishment of a board of directors that includes independent directors. Broker-dealers that market 529 college savings plans are also exempt from the Investment Company Act, but they must fully comply with MSRB rules. MSRB rules establish standards of fair practice, disclosure, suitability and professional qualifications for broker-dealers that provide important protections to the investing public. See Securities Regulation

Account Owners, Designated Beneficiaries and Rollovers:  Under IRC Section 529, an account in a state’s 529 college savings plan may be opened by any person (“account owner”) for any single individual (“designated beneficiary”), regardless of age, familial relationship, or whether the account owner or the designated beneficiary is a resident of that state. Once an account has been established for a designated beneficiary, the account owner is permitted to effect a rollover to change the beneficiary, but only to a member of the family of the original beneficiary and subject to other limitations if certain federal tax law advantages are to be retained. The account owner is also permitted to effect a rollover from one 529 college savings plan to another for the same beneficiary, but no more frequently than once a year without adverse federal tax consequences. Further, IRS Section 529 does not limit the ability of individuals to make contributions to an account established by another person. However, some states may, by state law or under their program rules, establish limitations on who may be an account owner, contributor or designated beneficiary or on when or how the account owner or designated beneficiary may be changed.

Selection of Investments:  As a general matter, federal tax law permits the account owner to select the types of investments in which contributions to a specific account will be made only when the account is initially opened. This selection will be among the various investment options made available by a particular state in its 529 college savings plan. Each state may provide a range of investment options, and the investment options may vary greatly from state to state. The Internal Revenue Service has stated in Notice 2001-55 that it will permit, without imperiling the federal tax advantages under IRC Section 529, an account owner to change the types of investments previously selected no more frequently than once a year and at any time upon a rollover to a new designated beneficiary. (Note: In Notice 2009-1, the Internal Revenue Service relaxed the change in investment strategy rule for 2009 only.  The Notice permits a change in the investment strategy selected for a section 529 account twice per calendar year for calendar year 2009.) Customers are not limited to investing in the 529 college savings plan in the customer's state of residence or the state in which the designated beneficiary will attend college. However, certain state tax and other benefits may only be available for in-state investments.

Program Disclosures:  Each 529 college savings plan typically provides information designed to assist investors in making a decision to invest in the plan and to choose among the available investment options within the plan. This information also is designed to assist investors in understanding how the 529 college savings plan operates. Virtually all plans provide information to the public through their websites.  In addition, for plans where a broker-dealer has been engaged as a primary distributor, SEC Rule 15c2-12 requires that the broker-dealer receive from the issuer a copy of an “official statement” (often referred to as a Plan Disclosure Document, Program Description or Disclosure Statement) that includes, among other things, information concerning the terms of the securities and information concerning the issuer and other entities, enterprises, funds, accounts and other persons material to an evaluation of the offering.  This requirement does not apply, however, in situations where state employees market their 529 college savings plans directly to investors without the assistance of a broker-dealer.  If a broker-dealer sells shares in a 529 college savings plan, it generally is obligated under MSRB Rule G-32 to provide a copy of the official statement to the investor by settlement.

Commissions and Other Fees and Charges:  As with the purchase of a mutual fund, a number of fees and charges may affect the total return on an investment in a 529 college savings plan.  A commission or “load” may be charged in connection with a sale of plan shares.  In addition, the issuer may charge annual or other miscellaneous charges.  Further, the investment management firm typically will charge a fee based on the assets under management.  Where the assets of a 529 college savings plan are invested in one or more mutual funds, any fees or charges associated with these underlying investments should also be factored into the total return on an investment.  Many of these fees and charges will be paid out of the assets in the plan and therefore will be paid by investors in the form of a reduction in share values.  Other charges, including but not limited to any up-front sales loads charged by broker-dealers or annual account maintenance fees charged by issuers, will be payable directly by the investor.

Investing Directly Through the State Plan:  Many states permit investors to invest in their 529 college savings plans by purchasing shares directly through state personnel without the assistance of a broker-dealer.  In a few states, this is the only manner in which investments are permitted.  In many other states, shares can be purchased either through state personnel or through broker-dealers.  Often, purchases through state personnel may be limited either to purchases made by residents of that state or to investments in selected portfolios offered through the plan. MSRB rules do not apply to sales by state personnel.

Investing Through a Broker-Dealer:  Most 529 college savings plans are marketed by broker-dealers. In some states, investments may only be made through broker-dealers, while in other states investments may be made either directly through the state or through a broker-dealer. Typically, a broker-dealer will act as the principal underwriter or primary distributor of a state’s 529 college savings plan. Often, this broker-dealer is affiliated with the investment management firm engaged by the state to manage the investment of plan assets. In many 529 college savings plans, broad distribution networks of selling broker-dealers have been established to assist primary distributors in marketing the plans. A broker-dealer may be a member of one or several distribution networks and therefore may market several different 529 college savings plans. However, such broker-dealer typically will not be able to offer every state’s plans to its customers. If a customer wishes to invest in a 529 college savings plan not offered by a particular broker-dealer, the customer will need to contact the plan directly or a broker-dealer that is authorized to market that plan. Broker-dealers must conduct their marketing activities in compliance with MSRB rules. MSRB rules establish standards of fair practice, disclosure, suitability and professional qualifications for broker-dealers that provide important protections to the investing public. See Securities Regulation.

Federal Tax Law Features:  529 college savings plans are characterized by three principal types of federal tax benefits. First, investment earnings from a plan are excluded from gross income of both the account owner and the beneficiary for federal income tax purposes if used to pay “qualified higher education expenses.” Such qualified higher education expenses generally include tuition, fees, books, supplies, required equipment and room and board for students who are at least half-time. Investment earnings not used to pay qualified higher education expenses will be subject to taxation and a penalty for the tax year in which such earnings are distributed, subject to certain exceptions. Second, a contributor to an account is permitted to make a single lump-sum gift of up to the five-year cumulative limit for tax free gifting, as opposed to making separate annual gifts, for purposes of the annual federal gift tax limitation. Third, contributions made to an account generally are excluded from the estate of the contributor for federal estate tax purposes. Account owners, other contributors and beneficiaries, as well as broker-dealers and others involved in marketing 529 college savings plans, are advised to consult with their tax consultants on these and other federal tax consequences, and the limitations and conditions relating thereto, of investing in 529 college savings plans. The federal tax consequences can differ significantly depending upon the specific facts and circumstances.

State Tax and Other Benefits:  Many states offer favorable state tax treatment or other valuable benefits to their residents in connection with investments in their own 529 college savings plan. Depending on the laws of the home state of the account owner or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 college savings plans may be available only if an investment is made in the home state’s 529 college savings plan. Any such state-based benefit offered with respect to a particular 529 college savings plan should be one of many appropriately weighted factors to be considered in making an investment decision. Contributors are advised to consult with their financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to their specific circumstances and also may wish to contact their home states or any other 529 college savings plans to learn more about the features, benefits and limitations of such 529 college savings plans.

Distinguished from Pre-Paid Tuition Plans:  Unlike 529 college savings plans, pre-paid tuition plans under IRC Section 529(b)(1)(A)(i), whether established by a state or educational institution, generally are not considered municipal fund securities. Many of the sources cited below also provide information regarding pre-paid tuition plans.

For More Information: More information about 529 college savings plans may be obtained from each of the states that have established a plan, the broker-dealers that market the plans and a number of other third parties. The College Savings Plan Network (CSPN), an affiliate of the National Association of State Treasurers, serves as a clearinghouse for information on 529 college savings plans throughout the country. CSPN, the Investment Company Institute (ICI) and the North American Securities Administrators Association (NASAA) have published A Guide to Understanding 529 Plans. NASD also has published Smart Saving for College -- Better Buy Degrees: 529 Plans and Other College Savings Options. Information regarding some of the federal tax consequences of investing in 529 college savings plans and other education savings vehicles is available from the Internal Revenue Service in Publication 970 -- Tax Benefits for Education. Information also is available from several privately operated organizations. The MSRB does not control or maintain these web sites, nor does it guarantee the accuracy or completeness of the information on these web sites.

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