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PLANS

A 529 plan may be set up either as a prepaid tuition plan or as a college savings plan. With the prepaid tuition plan, the plan locks in a current tuition rate at a specific school. A college cost-savings account may be opened by any adult; the donor does not have to be related to the child. Contributions to a 529 plan are made with after-tax dollars and are allowed to grow tax-deferred. The assets in the account remain under the control of the donor even after the student reaches the age of majority. The funds may be used to meet the student's educational needs and the growth may be withdrawn federally tax-free. Most states also allow the assets to be withdrawn tax-free. There are no income limits for the donors and contribution limits vary from state to state.

LOCAL GOVERNMENT INVESTMENT POOLS (LGIPs)

Local government investment pools (LGIPs) allow states and local governments to manage their cash reserves and to receive money market rates on the funds. LGIPs may also be created to invest the proceeds of a bond offering if the proceeds of the offering are intended to be used to call in an existing bond issue. If the LGIP was created to predefined an existing issue, additional restrictions will apply as to the type of investments that may be purchased by the pool. LGIPs that are created to manage cash reserves must only invest in securities on the state's legal or approved list. The legal list usually includes investments such as:

• Commercial paper rated in the two highest categories.

• U.S. government and agency debt.

• Bankers' acceptances.

• Repurchase agreement.

• Municipal debt issues within the state.

• Investment company securities.

• Certificates of deposit.

• Savings accounts.

Each state has an investment advisory board that works with the state treasury office to administer the pools. The main objective of these pools is safety of principal, with liquidity and interest income as secondary objectives. The pools require that the following be detailed in writing:

• Delegation of authority to make investments.

• Annual investment activity reports.

• Statement of safekeeping of securities.

Municipal fund securities are not considered to be investment companies and are not required to register under the Investment Company Act of 1940. Additionally, prepaid tuition plans are not considered to be municipal fund securities. LGIP employees who market the plans directly to investors are exempt from MSRB rules; however, if the LGIP is marketed to investors by employees of a broker dealer, the broker dealer and all of its employees are subject to MSRB rules.

 
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