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Series 51 study materials
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Series 51 practice questions

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Question 1Municipal Fund Securities: Products, Structure and Markets

Which of the following is a municipal fund security?

  1. A share of a money market mutual fund registered under the Investment Company Act of 1940
  2. A certificate of deposit issued by a state-chartered bank
  3. An interest in a state-sponsored 529 college savings program Correct answer.
  4. A revenue bond issued by a toll authority

Explanation

Municipal fund securities are interests in trusts or pools created by a state or municipal entity; 529 plans, ABLE programs, and local government investment pools are the principal examples. They are municipal securities for purposes of MSRB rules even though they are exempt from Securities Act registration.

Question 2Municipal Fund Securities: Products, Structure and Markets

Which organization writes the rules that govern broker-dealer sales of municipal fund securities?

  1. FINRA
  2. The Office of the Comptroller of the Currency
  3. The MSRB Correct answer.
  4. The SEC's Division of Investment Management

Explanation

The MSRB writes and interprets the rules governing transactions in municipal securities, and municipal fund securities fall within that definition. The SEC approves MSRB rules and FINRA enforces them against member firms, but neither body writes them.

Question 3Municipal Fund Securities: Products, Structure and Markets

Which expense is a qualified higher education expense for a 529 college savings plan?

  1. A gym membership at the campus recreation center
  2. Tuition and required fees at an eligible institution Correct answer.
  3. Room and board for a student enrolled less than half time
  4. Transportation between home and campus

Explanation

Qualified higher education expenses include tuition, fees, books, supplies, and required equipment, plus room and board only for students enrolled at least half time. Transportation and discretionary items such as recreation fees are not qualified.

Question 4Municipal Fund Securities: Products, Structure and Markets

An ABLE account is designed primarily to allow a beneficiary to:

  1. Accumulate funds for retirement income
  2. Pay qualified disability expenses Correct answer.
  3. Save for a child's private elementary school tuition
  4. Prepay tuition at a state university at today's prices

Explanation

ABLE programs allow an eligible individual whose disability began before the statutory age threshold to save for qualified disability expenses, and qualifying distributions are disregarded for most federal means-tested benefit programs. Education funding and retirement savings are the purposes of 529 plans and IRAs, not ABLE accounts.

Question 5Municipal Fund Securities: Products, Structure and Markets

Which statement about the federal tax treatment of a 529 college savings plan is accurate?

  1. Qualified withdrawals are taxed at long-term capital gains rates
  2. Contributions are deductible on the account owner's federal return
  3. Earnings grow tax-deferred and qualified withdrawals are tax free Correct answer.
  4. Earnings are taxed each year to the account owner as ordinary income

Explanation

There is no federal deduction for 529 contributions; instead earnings accumulate tax-deferred and escape federal income tax when withdrawn for qualified expenses. Only the earnings portion of a nonqualified withdrawal loses that exclusion.

Question 6Municipal Fund Securities: Products, Structure and Markets

A local government investment pool is best described as:

  1. A government-sponsored pool investing public funds in short-term instruments Correct answer.
  2. A federal program that makes loans to municipalities
  3. A trust that holds only long-term municipal bonds
  4. A mutual fund registered under the Investment Company Act of 1940 and sold to the general public

Explanation

An LGIP is a pool sponsored by a state or local government so that public entities can invest cash reserves collectively in short-term, high-quality instruments. It is not a registered investment company and is not offered to the general public.

Question 7Municipal Fund Securities: Products, Structure and Markets

An investor takes a nonqualified withdrawal from a 529 savings plan. The earnings portion is generally subject to:

  1. Ordinary income plus a 10% additional tax Correct answer.
  2. A 10% penalty only
  3. No federal tax, because 529 plans are tax exempt
  4. Capital gains tax only

Explanation

A nonqualified withdrawal is taxed only on the earnings portion, which is included in gross income and generally increased by a 10% additional tax. Exceptions such as death, disability, or a tax-free scholarship waive the additional tax but not the income inclusion.

Question 8Municipal Fund Securities: Products, Structure and Markets

Interests in a state 529 plan are exempt from registration under the Securities Act of 1933 because:

  1. They are municipal securities of a state or its authority Correct answer.
  2. They are guaranteed by the federal government
  3. They are sold only to accredited investors
  4. They are registered under the Investment Company Act of 1940 instead

Explanation

Section 3(a)(2) of the Securities Act exempts securities issued by a state or political subdivision, and 529 interests are treated as such securities. Exemption from registration does not exempt the sale from MSRB rules or the antifraud provisions.

Question 9Municipal Fund Securities: Products, Structure and Markets

Under MSRB rules, before recommending a 529 plan to a retail customer, a dealer must:

  1. Confirm that the customer holds no other college savings accounts
  2. Have a reasonable basis to believe the recommendation fits the customer Correct answer.
  3. Obtain written approval from the state plan sponsor before executing the sale
  4. Guarantee the customer a minimum rate of return

Explanation

MSRB Rule G-19 requires a dealer recommending a municipal fund security to have a reasonable basis for the recommendation after considering the customer's financial situation, needs, and objectives. The obligation cannot be satisfied by disclaimers or shifted to the plan sponsor.

Question 10Municipal Fund Securities: Products, Structure and Markets

MSRB Rule G-15 requires a dealer's confirmation for a municipal fund security transaction to disclose which of the following?

  1. The CUSIP numbers of the underlying portfolio holdings
  2. The names and addresses of the other plan shareholders
  3. The amount of any sales charge Correct answer.
  4. The plan sponsor's audited financial statements

Explanation

Rule G-15 requires a confirmation for a municipal fund security to show the price, the amount of any sales charge, and a statement that the security is a municipal fund security. It does not require disclosure of underlying portfolio holdings or sponsor financial statements.

Question 11Municipal Fund Securities: Products, Structure and Markets

Under MSRB Rule G-21, advertising for a municipal fund security must:

  1. Be fair and balanced and receive principal approval Correct answer.
  2. Be filed with the MSRB before first use
  3. Include the plan's ten-year performance history
  4. Omit any reference to state tax benefits

Explanation

Rule G-21 applies fair-dealing principles to advertising and requires that material be fair and balanced, not misleading, and approved by a qualified principal before first use. There is no requirement to pre-file the material with the MSRB.

Question 12Municipal Fund Securities: Products, Structure and Markets

An account owner wants to move funds from one state's 529 savings plan to another state's plan for the same beneficiary. Under federal tax law, such a rollover is permitted:

  1. No more than once every 12 months Correct answer.
  2. Only if the beneficiary is under age 18
  3. At any time and in any number of transactions
  4. Only when the original plan is closed by the state

Explanation

Federal tax law permits a rollover from one 529 plan to another for the same beneficiary no more than once in any 12-month period. A second rollover within that window is treated as a nonqualified distribution of earnings.

Question 13Municipal Fund Securities: Products, Structure and Markets

A 529 account owner changes the beneficiary from one child to a sibling. The change:

  1. Is prohibited unless the plan is a prepaid tuition plan
  2. Triggers ordinary income tax on all earnings
  3. Requires the written consent of the original beneficiary in every case
  4. Is not a taxable event if the new beneficiary is a family member Correct answer.

Explanation

A change of beneficiary is not a taxable distribution when the new beneficiary is a member of the family of the designated beneficiary, a term that includes siblings, children, and parents. Consent of the original beneficiary is not a general requirement.

Question 14Municipal Fund Securities: Products, Structure and Markets

Which feature distinguishes a prepaid tuition plan from a savings-type 529 plan?

  1. Prepaid plans lock in future tuition at current prices; savings plans vary with investment results Correct answer.
  2. Prepaid plans may be used only at public colleges in the sponsoring state, while savings plans may be used anywhere
  3. Prepaid plans are backed by the federal government, while savings plans are not
  4. Prepaid plans invest solely in equities, while savings plans hold only cash equivalents

Explanation

Prepaid plans sell tuition credits or units at today's price, so the plan bears tuition inflation risk and the investor receives a tuition benefit rather than a market-based account value. Savings plans are investment accounts whose value rises and falls with the underlying portfolios.

Question 15Municipal Fund Securities: Products, Structure and Markets

An investor claimed a state income tax deduction for contributions to her home state's 529 plan and later rolled the funds to another state's plan. She should expect:

  1. A federal tax credit for the difference in state benefits
  2. The new state to refund the original deduction
  3. The earlier deduction to be recaptured as state income Correct answer.
  4. No consequence, because state deductions are never recaptured

Explanation

States that offer a deduction commonly recapture it when assets leave the in-state plan or are withdrawn for nonqualified purposes. The consequence is a matter of state tax law and does not create a federal credit.

Question 16Municipal Fund Securities: Products, Structure and Markets

Which investors normally may participate in a local government investment pool?

  1. Only registered investment advisers acting for clients
  2. Only natural persons who reside in the sponsoring state
  3. Cities, counties, school districts, and similar public entities Correct answer.
  4. Any retail investor who maintains a brokerage account with a member firm

Explanation

LGIPs exist to manage public funds, so participation is limited to governmental and public entities and certain related entities designated by the sponsor. Retail investors are not eligible to buy LGIP shares.

Question 17Municipal Fund Securities: Products, Structure and Markets

Most local government investment pools seek to maintain a stable share price:

  1. By holding short-term, high-quality instruments valued at amortized cost Correct answer.
  2. By insuring every participant account with full federal deposit insurance coverage
  3. By investing primarily in long-term municipal bonds held to maturity
  4. By guaranteeing participants a fixed yield set by the sponsor

Explanation

LGIPs pursue a stable value by holding a portfolio of short-term, high-quality instruments and valuing it at amortized cost. The stable value is an investment objective, not an insurance or a guarantee.

Question 18Municipal Fund Securities: Products, Structure and Markets

Within a 529 savings plan, Class A and Class C shares typically differ in which way?

  1. Class A shares are available only to institutional investors and may not be sold to retail customers
  2. Class A charges a front-end load but lower annual fees; Class C charges higher annual fees Correct answer.
  3. Class A shares may never be exchanged for another share class
  4. Class C shares may be purchased only by residents of the sponsoring state

Explanation

Share classes allocate distribution costs differently: front-load classes recover those costs at purchase and carry lower annual fees, while level-load classes carry higher annual asset-based fees. The appropriate class depends on the amount invested and the expected holding period.

Question 19Municipal Fund Securities: Products, Structure and Markets

Which use of 529 savings plan assets is a qualified expense under federal law?

  1. Repayment of the beneficiary's credit card debt
  2. A down payment on the beneficiary's first home
  3. Up to $10,000 a year of K-12 tuition Correct answer.
  4. Purchase of a car for commuting to campus

Explanation

Federal law treats up to $10,000 per beneficiary per year of elementary and secondary school tuition as a qualified expense, in addition to qualified postsecondary costs. Consumer debt, vehicle purchases, and home purchases are not qualified.

Question 20Municipal Fund Securities: Products, Structure and Markets

Aggregate annual contributions to an ABLE account are limited by:

  1. A lifetime cap of $10,000 per designated beneficiary
  2. The annual federal gift tax exclusion amount Correct answer.
  3. The beneficiary's earned income, as with a traditional IRA
  4. The number of designated beneficiaries enrolled in the program

Explanation

Contributions from all sources may not exceed the annual federal gift tax exclusion in a year, and a working beneficiary may add a limited amount based on compensation. The lifetime ceiling on account size is set by the state program, not at $10,000.

Question 21Municipal Fund Securities: Products, Structure and Markets

A representative recommends Class A shares of a 529 plan carrying a 3.5% front-end load to a customer with a 15-year horizon who can meet the $3,000 minimum; Class C shares with no load but a 1.00% annual distribution fee are also available. The recommendation is most consistent with MSRB rules if the representative:

  1. Recommended Class A because the customer cannot later exchange classes
  2. Found that lower ongoing costs of Class A outweighed the load over the customer's horizon Correct answer.
  3. Selected Class A because it pays the representative a higher up-front commission
  4. Recommended the class with the lowest first-year expense regardless of the customer's holding period

Explanation

Rule G-19 requires the recommendation, including the share-class choice, to be suitable for the customer's objectives and time horizon. With a long holding period and a modest front-end charge, the lower annual expenses of Class A usually produce the lower total cost, and compensation must not drive the choice.

Question 22Municipal Fund Securities: Products, Structure and Markets

Which statement best describes the credit exposure of an investor in a direct-sold 529 savings plan?

  1. The investor bears market risk; the state does not guarantee the account Correct answer.
  2. The account is backed by the full faith and credit of the U.S. Treasury
  3. The account balance is a general obligation of the sponsoring state
  4. Each account is insured up to $250,000 by federal deposit insurance coverage

Explanation

In a savings plan the account owner bears the investment risk of the selected portfolios, and the assets are held in trust for the beneficiary rather than as an obligation of the state. The account carries no federal deposit insurance and no Treasury guarantee.

Question 23Municipal Fund Securities: Products, Structure and Markets

A beneficiary receives a tax-free scholarship covering tuition, and the account owner withdraws an amount equal to the scholarship. The result is that:

  1. The earnings portion is includible in gross income but the 10% additional tax does not apply Correct answer.
  2. The withdrawal must be rolled over within 60 days to avoid tax
  3. The withdrawal is entirely tax free, including earnings
  4. The withdrawal is subject to the 10% additional tax but not income tax

Explanation

The scholarship exception waives the 10% additional tax on earnings withdrawn up to the amount of the tax-free scholarship, but those earnings remain taxable income in the year of distribution. The exception is elective and does not make the entire withdrawal tax free.

Question 24Municipal Fund Securities: Products, Structure and Markets

Which statement comparing a 529 plan with an ABLE account is accurate?

  1. ABLE accounts have no annual contribution limits of any kind
  2. ABLE accounts face Medicaid recovery and require qualified disability expenses Correct answer.
  3. ABLE accounts may be used for any purpose without any tax consequence to the beneficiary
  4. 529 plans are available only to beneficiaries with disabilities

Explanation

ABLE accounts receive tax-free treatment only for qualified disability expenses, and a state may recover amounts for Medicaid benefits provided after the beneficiary's death. 529 plans have no Medicaid recovery feature and are not limited to beneficiaries with disabilities.

Question 25Municipal Fund Securities: Products, Structure and Markets

Which statement about a local government investment pool is accurate?

  1. It is an unregistered pool whose dealer-sold shares are municipal fund securities Correct answer.
  2. Participants are protected against loss of principal by SIPC
  3. Its yield is fixed by the sponsoring state for each fiscal year
  4. It is a money market fund regulated under Rule 2a-7 of the Investment Company Act of 1940

Explanation

An LGIP is an exempt municipal fund security: it is not registered under the Investment Company Act of 1940, is not federally insured, and is not covered by SIPC. Dealer transactions in LGIP interests are nonetheless subject to MSRB rules.

Question 26Municipal Fund Securities: Products, Structure and Markets

Which of the following interests is a municipal fund security subject to MSRB rules?

  1. An interest in a state 529 savings plan Correct answer.
  2. A Treasury bill pledged as collateral by a city
  3. A corporate bond held in a city's investment portfolio
  4. A money market fund that buys municipal notes

Explanation

MSRB Rule D-12 defines municipal fund securities to include interests in 529 savings plans and local government investment pools, which are issued by states or their instrumentalities but are not registered under the Securities Act of 1933. Ordinary bonds, money market funds and Treasuries fall outside that definition.

Question 27Municipal Fund Securities: Products, Structure and Markets

A distribution from a 529 savings plan used to pay qualified higher education expenses is:

  1. taxed at ordinary rates on the full amount
  2. free of federal income tax, including earnings Correct answer.
  3. taxed only if the beneficiary is under age 24
  4. taxed at capital gains rates on the earnings

Explanation

Under Internal Revenue Code Section 529, earnings are excluded from gross income when distributions do not exceed the beneficiary's qualified expenses. Only the earnings portion of a nonqualified distribution is subject to income tax, along with a 10% additional tax.

Question 28Municipal Fund Securities: Products, Structure and Markets

In a 529 savings plan, which party keeps control of the account and may change the beneficiary?

  1. The beneficiary upon reaching the age of majority
  2. The state that sponsors the plan
  3. The plan's program manager
  4. The account owner Correct answer.

Explanation

The account owner is the legal owner of the account and retains control over investment selection, distributions and beneficiary changes. The beneficiary has no legal right to the assets, and neither the state nor the program manager may direct the account.

Question 29Municipal Fund Securities: Products, Structure and Markets

Participation in a local government investment pool is generally limited to:

  1. any investor meeting the pool's minimum purchase
  2. registered advisers acting for retail clients
  3. individual residents of the sponsoring state
  4. cities, counties and school districts Correct answer.

Explanation

An LGIP is a pooled investment vehicle created by a state or municipal entity for the short-term investment of public funds, so eligibility is confined to governmental participants and similar public entities authorized by the pool's documents. Retail investors and advisers acting for them are not eligible.

Question 30Municipal Fund Securities: Products, Structure and Markets

Most local government investment pools seek to maintain a stable net asset value of:

  1. $1.00 per share Correct answer.
  2. $100.00 per share
  3. the pool's initial offering price plus accrued interest
  4. $10.00 per share

Explanation

LGIPs are managed like money market funds, with short maturities and high-quality holdings, so that the shares can be priced and redeemed at a constant $1.00 per share. The stable value is a target rather than a guarantee.

Question 31Municipal Fund Securities: Products, Structure and Markets

A prepaid tuition plan generally allows the purchaser to:

  1. receive a guaranteed return equal to inflation plus 2%
  2. defer all taxes until the beneficiary turns 30
  3. select from a menu of equity and bond portfolios
  4. buy tuition units or credits at today's prices Correct answer.

Explanation

A prepaid plan sells tuition credits or units that lock in the plan's current price for use in the future, so the purchaser is hedging against tuition inflation rather than choosing investments. The credits typically cover tuition and mandatory fees but not room, board or books.

Question 32Municipal Fund Securities: Products, Structure and Markets

Contributions to a 529 savings plan are:

  1. not deductible for federal income tax purposes Correct answer.
  2. taxable to the beneficiary in the year contributed
  3. subject to Social Security and Medicare taxes
  4. deductible on the contributor's federal income tax return

Explanation

The federal tax benefit of a 529 plan comes at withdrawal, when qualified distributions are free of income tax on the earnings. Contributions are made with after-tax dollars, although many states allow a deduction or credit on the state return.

Question 33Municipal Fund Securities: Products, Structure and Markets

Before investing in a 529 savings plan, a customer should be given:

  1. a prospectus filed under the Investment Company Act of 1940
  2. a Form 10-K filed with the SEC by the plan manager
  3. the plan's program description or disclosure statement Correct answer.
  4. an official statement for the state's general obligation bonds

Explanation

Interests in a 529 plan are exempt from Securities Act registration, so no prospectus is prepared. Instead, MSRB rules require delivery of the plan's disclosure document, which describes fees, investment options, tax consequences, risks and program mechanics.

Question 34Municipal Fund Securities: Products, Structure and Markets

An investor withdraws $20,000 from a 529 savings plan for nonqualified purposes. Contributions totaled $15,000 and earnings were $5,000. The federal tax result is that:

  1. only the $15,000 of contributions is taxable, with no additional tax
  2. nothing is taxable because the withdrawal is a return of principal
  3. $5,000 of earnings is taxable plus a 10% penalty Correct answer.
  4. the entire $20,000 is taxable income and subject to a 10% additional tax

Explanation

Nonqualified distributions are taxed on a pro rata basis: the earnings portion is included in gross income and also subject to the 10% additional tax, while the contributions portion is a tax-free return of after-tax dollars. Here earnings are 25% of the balance, so $5,000 is taxable.

Question 35Municipal Fund Securities: Products, Structure and Markets

A beneficiary receives a tax-free scholarship covering part of her tuition, and the account owner withdraws an amount equal to that scholarship. The withdrawal is:

  1. fully taxable and subject to the 10% additional tax
  2. entirely tax-free because scholarships are always tax-free
  3. taxable at capital gains rates with no additional tax
  4. taxable on earnings only, without the 10% penalty Correct answer.

Explanation

Section 529 waives the 10% additional tax to the extent a distribution is not needed because the beneficiary received a tax-free scholarship or attended a U.S. military academy. The earnings portion of that distribution, however, is still includible in the beneficiary's income.

Question 36Municipal Fund Securities: Products, Structure and Markets

An account owner wants to pay elementary school tuition with 529 savings plan assets. Under federal law, the maximum tax-free distribution for K-12 tuition is:

  1. $35,000 per beneficiary per year
  2. $10,000 over the beneficiary's lifetime
  3. unlimited, if the school is accredited
  4. $10,000 per beneficiary per year Correct answer.

Explanation

Federal law allows up to $10,000 per beneficiary per year of tax-free 529 distributions for elementary and secondary school tuition. The allowance covers tuition only, not supplies, transportation or extracurricular costs, and state tax treatment may differ.

Question 37Municipal Fund Securities: Products, Structure and Markets

A 529 account owner withdraws funds to repay a beneficiary's qualified education loans. The maximum lifetime tax-free amount per beneficiary is:

  1. no limit, because loans are qualified expenses
  2. $5,000
  3. $100,000
  4. $10,000 Correct answer.

Explanation

Up to $10,000 of student loan repayment is treated as a qualified expense for each beneficiary over a lifetime, and a sibling may also receive up to $10,000 from the same account. Repayments above the cap are nonqualified distributions of the earnings portion.

Question 38Municipal Fund Securities: Products, Structure and Markets

Under federal tax rules, how often may the owner of a 529 savings plan change the investment options for the same beneficiary?

  1. Twice per calendar year Correct answer.
  2. Once per calendar quarter
  3. At any time, without limit
  4. Once per calendar year

Explanation

IRS regulations permit investment direction changes for the same beneficiary no more than twice per calendar year, with additional flexibility when the beneficiary is changed. This limit prevents the account from being actively traded like a brokerage account.

Question 39Municipal Fund Securities: Products, Structure and Markets

A grandparent makes a lump-sum contribution to a grandchild's 529 plan and elects to spread it over five years for gift tax purposes. If the annual exclusion is $19,000, the largest single contribution covered by the election is:

  1. $38,000
  2. $190,000
  3. $19,000
  4. $95,000 Correct answer.

Explanation

Section 529 permits a donor to elect to treat a contribution as made ratably over five years, so $95,000 uses five annual exclusions of $19,000. A gift tax return is required to make the election, and further gifts to the same beneficiary during the period can create a taxable gift.

Question 40Municipal Fund Securities: Products, Structure and Markets

An investor deducted contributions to her home state's 529 plan on her state return and later rolled the account to another state's plan. The likely state tax consequence is:

  1. a federal 10% penalty on the rolled-over earnings
  2. loss of the federal gift tax annual exclusion for the year
  3. recapture of the prior state deductions as taxable income Correct answer.
  4. nothing, because rollovers are always tax-free at the state level

Explanation

A state deduction is usually conditioned on the money staying in the home state program, so many states recapture previously claimed deductions, and related earnings, when funds are rolled elsewhere. The rollover generally remains free of federal income tax.

Question 41Municipal Fund Securities: Products, Structure and Markets

Within an advisor-sold 529 plan, Class A shares and Class C shares typically differ in that Class A shares:

  1. impose a front-end load and Class C shares impose ongoing fees Correct answer.
  2. assess a level 12b-1 fee and Class C shares do not
  3. carry a contingent deferred sales charge and Class C shares do not
  4. are sold only to institutions and Class C shares only to retail

Explanation

Class A shares generally charge a sales load at the time of purchase and lower annual distribution fees, while Class C shares typically have no front-end load but higher ongoing fees and sometimes a contingent deferred sales charge in early years. Class A often costs less over long holding periods and Class C over short ones.

Question 42Municipal Fund Securities: Products, Structure and Markets

An age-based portfolio in a 529 savings plan typically:

  1. keeps a fixed asset allocation regardless of the beneficiary's age
  2. rebalances only when the account owner requests a change
  3. guarantees the account will not lose value before enrollment
  4. moves from stocks toward bonds as the child ages Correct answer.

Explanation

Age-based, or enrollment-year, portfolios follow a glide path that reduces equity exposure and increases fixed income and cash as the beneficiary approaches college age. The portfolios still carry market risk, and the schedule is set by the program rather than requested by the owner.

Question 43Municipal Fund Securities: Products, Structure and Markets

Which statement about direct-sold and advisor-sold 529 plans is accurate?

  1. Advisor-sold plans typically carry higher fees to pay for advice Correct answer.
  2. Direct-sold plans generally charge a front-end sales load
  3. Direct-sold plans are limited to residents of the sponsoring state and their families
  4. Advisor-sold plans are exempt from MSRB advertising rules

Explanation

Advisor-sold plans build in distribution costs such as sales loads and annual distribution fees that compensate the selling firm, while direct-sold plans are purchased without a commission and generally have lower expense ratios. Both types are municipal fund securities and both are subject to MSRB rules.

Question 44Municipal Fund Securities: Products, Structure and Markets

Contributions to an ABLE account from all contributors other than the beneficiary are capped each year at:

  1. no fixed amount; only lifetime limits apply
  2. the federal gift tax annual exclusion amount Correct answer.
  3. $10,000 per beneficiary
  4. the state's 529 contribution limit

Explanation

Annual contributions to an ABLE account from contributors other than the beneficiary are limited to the gift tax annual exclusion, which is $19,000 in 2025. The beneficiary's own contributions are subject to a separate limit based on earned income, and states impose lifetime balance caps.

Question 45Municipal Fund Securities: Products, Structure and Markets

A 529 account owner wants to provide for the account's transfer if she dies. The proper step is to:

  1. transfer the account to a custodial account under UTMA
  2. designate a successor owner in the plan's records Correct answer.
  3. add a joint owner to the account at any time
  4. name the beneficiary as the successor owner immediately

Explanation

Plans allow the account owner to designate a successor owner who assumes control if the owner dies or becomes incapacitated, preserving the account for the beneficiary. Naming the beneficiary as successor owner can cause the account to be treated as the beneficiary's own property, with gift and control consequences.

Question 46Municipal Fund Securities: Products, Structure and Markets

A distribution from an ABLE account used to pay a qualified disability expense is:

  1. taxable to the contributor who funded the account
  2. taxable to the beneficiary at capital gains rates
  3. always taxable because ABLE accounts are not tax-advantaged
  4. excluded from the beneficiary's gross income Correct answer.

Explanation

ABLE accounts grow tax-deferred and distributions for qualified disability expenses are excluded from gross income. A distribution that is not for a qualified disability expense is taxable on the earnings portion and may also incur a 10% additional tax.

Question 47Municipal Fund Securities: Products, Structure and Markets

Under recent federal law, a 529 account owner may roll funds to the beneficiary's Roth IRA if:

  1. the account is at least 15 years old and IRA limits are met Correct answer.
  2. the account owner is also the Roth IRA owner
  3. the rollover is completed before the beneficiary reaches age 18
  4. the total rolled over does not exceed $100,000 per beneficiary

Explanation

The 529-to-Roth IRA rollover requires the 529 account to have been maintained for at least 15 years, is limited to $35,000 over the beneficiary's lifetime, and must respect annual Roth IRA contribution limits and the beneficiary's earned income. The Roth IRA must be maintained for the 529 beneficiary.

Question 48Municipal Fund Securities: Products, Structure and Markets

Which statement about the principal stability of a local government investment pool is accurate?

  1. The pool's $1.00 share price is insured by the FDIC
  2. Pool shares are backed by the full faith and credit of the United States
  3. The sponsoring state guarantees the pool against loss
  4. The $1.00 share price is a target and can be broken Correct answer.

Explanation

LGIPs seek to maintain a stable $1.00 net asset value but do not guarantee it, and a pool can suffer losses if holdings default or interest rates move sharply. Pool interests are not FDIC-insured and carry no state or federal guarantee.

Question 49Municipal Fund Securities: Products, Structure and Markets

A student holds a prepaid tuition contract for a state's public universities but enrolls at an out-of-state private college. Typically the plan will:

  1. require the student to attend a state school before any payout
  2. pay the in-state weighted average tuition value, which may fall short Correct answer.
  3. refund the full purchase price plus the average tuition growth of the plan
  4. pay nothing, because the contract is void for nonresident attendance

Explanation

Prepaid plans usually disburse the value of the tuition units, often measured by the weighted average tuition of in-state public schools, when the beneficiary attends an out-of-state or private institution. The payout may be less than actual tuition, leaving a gap the family must fund.

Question 50Municipal Fund Securities: Products, Structure and Markets

If the investment options in a direct-sold 529 savings plan lose value, the loss is borne by:

  1. the account owner Correct answer.
  2. the program manager
  3. the sponsoring state
  4. the federal government under the plan's insurance

Explanation

A 529 savings plan is an investment account, not a guaranteed savings vehicle, so the account owner bears market risk even though the state sponsors the plan and hires a program manager. Fees paid to the manager do not obligate it to make up investment losses.