529 Plans & ABLE Accounts

The SIE loves the classification question: “Which of the following is a municipal fund security?” — the answer is the 529 (and the ABLE account), and the tell is that it’s disclosed like a muni bond even though the money buys mutual-fund-like investment portfolios that typically glide more conservative as college nears. Watch for the gift-tax superfunding hook: a donor can front-load five years of annual exclusion gifts at once — for 2026 roughly $95,000 single / $190,000 married (some older banks still cite the 2024 ~$90k/$180k) — and elect (Form 709) to spread it evenly, 20% per year. Another favorite is the control point: unlike a UGMA/UTMA custodial account, where assets pass to the child at the age of majority, the 529 owner keeps control.

The classic trap is conflating tax treatments: a 529 grows tax-deferred with tax-free qualified withdrawals, whereas a variable annuity is only tax-deferred — earnings come out first (LIFO) and are taxed as ordinary income. Don’t confuse a muni bond’s federal interest exemption with the 529’s withdrawal exemption — different mechanisms. Memory hook: 529 = a “municipal” wrapper around a mutual fund.