Variable Annuities, 529 Plans, and ABLE Accounts

Two product families share this lesson. Each holds an investment portfolio inside a legal wrapper. The exam tests you on the wrapper: who controls it, what it costs you to get out, and what your money may buy.

Variable annuities and the separate account

A variable annuity is a contract between an investor and an insurance company. The investor pays in, the money grows, and the contract can later pay income for life. Its value follows the investments the investor picks, so the investor carries the market risk.

That risk makes a variable annuity a security. It registers with the SEC and sells by prospectus. A fixed annuity pays a rate the insurer guarantees, so it is insurance only, not a security.

Purchase payments go into the separate account, which the insurer keeps apart from its own general account. The separate account registers with the SEC as an investment company. Inside it sit sub-accounts, each a portfolio run much like a mutual fund. Moving money between sub-accounts costs no federal tax on the gains.

That separation protects the investor. General account assets back the insurer's guarantees, and its creditors can reach them. Separate account assets belong to the contract holders.

A variable annuity runs in two phases. In the accumulation phase the investor pays in and earnings build tax-deferred. In the payout phase, which starts at annuitization, the contract turns the value into income payments.

What a variable annuity costs

Costs run higher here than on a mutual fund, and the exam expects you to know the names.

• A sales charge pays the firm that sold the contract. Most contracts take nothing up front and recover it through the surrender charge instead.
• A surrender charge is a fee the insurer takes when the investor withdraws or cancels inside the surrender period. It starts high and steps down: 7% in year one, 6% in year two, on down to zero. The period commonly runs six to eight years, sometimes as long as ten. Most contracts allow a yearly withdrawal, often 10% of contract value, free of the charge.
• A mortality and expense risk charge (M&E) runs roughly 1% to 1.5% of contract value a year. It pays the insurer for the death benefit promise and for the risk its own costs run over.
• The sub-accounts charge their own yearly fund expenses on top.

Before you recommend a withdrawal, check the age. A withdrawal before age 59 1/2 costs a 10% federal penalty on the earnings, plus ordinary income tax. Annuity withdrawals never get capital gains rates.

Who a variable annuity suits

A variable annuity fits an investor with a long time horizon who wants tax-deferred growth now and lifetime income later. The deferral only beats the extra fees over many years, and the surrender period ties the money up for most of a decade. An investor who may need cash soon belongs elsewhere.

Inside an IRA or a 401(k) a variable annuity adds no tax benefit. Those accounts already defer tax, so the investor pays extra fees for something already owned.

Municipal fund securities

A municipal fund security is a pooled investment program issued by a state or a state agency. Three kinds count for your exam: 529 plans, local government investment pools, and ABLE accounts. Because a state issues them, MSRB rules apply. The MSRB writes those rules and FINRA enforces them against broker-dealers.

A bond is debt the issuer repays on set terms. A municipal fund security is an interest in a pool whose value floats, and a municipal bond is not one.

529 plans: prepaid tuition and savings

A 529 plan is a state-sponsored education savings program, named for the tax code section that created it. It comes in two forms.

• A prepaid tuition plan buys future tuition credits at today's prices, usually at in-state public colleges. It hedges tuition inflation instead of tracking a portfolio.
• A savings plan invests contributions in a menu of portfolios. Age-based options shift toward bonds as the beneficiary nears college, and static options hold a fixed mix. Values rise and fall with the markets, and nothing is guaranteed.

A direct-sold plan comes straight from the state or its program manager with no sales load, so fees run lower. An adviser-sold plan comes through a broker-dealer or an adviser who gives advice and charges a sales load plus higher yearly costs.

Any investor may buy any state's plan. A state income tax deduction, where one exists, usually applies only to that state's own plan.

Owner, beneficiary, and restricted use

The account owner controls a 529 plan. The owner directs the investments, sets the timing of withdrawals, and may change the beneficiary to a family member of the original one. The beneficiary is the student the money is meant for, and never takes control at any age. A UTMA custodial account works the other way, because the minor takes ownership at the age of majority.

Contributions buy no federal deduction, though many states give a state deduction. Earnings grow tax-deferred, and withdrawals for qualified education expenses escape federal tax.

Qualified expenses cover tuition, fees, books, supplies, and room and board for a student enrolled at least half time. Since 2026 a plan may also pay up to $20,000 per beneficiary per year for K-12 expenses, up from $10,000. Up to $10,000 over a lifetime may repay student loans.

Money spent on anything else makes a non-qualified withdrawal. The earnings pay income tax plus a 10% federal penalty, and the contributions come back untaxed. A scholarship is the exception: the owner may withdraw up to the scholarship amount with no penalty, though tax on the earnings still applies. The owner may also redirect money already contributed twice per calendar year.

LGIPs and ABLE accounts

A local government investment pool (LGIP) is a pool a state runs so cities, counties, and school districts can invest spare cash for short periods. It works much like a money market fund. Individuals cannot buy in.

An ABLE account (Achieving a Better Life Experience) serves a person whose significant disability began before age 46. That person is both the owner and the beneficiary, and may hold only one ABLE account. A parent, a guardian, or an agent under a power of attorney may open it for them.

Earnings escape federal tax when the money pays qualified disability expenses. That list is broad: housing, transportation, education, health, employment support, and assistive technology.

The yearly contribution limit is $20,000 for 2026. Before 2026 the limit matched the federal gift tax exclusion each year, but a 2025 law change put the ABLE limit on its own schedule. A working beneficiary with no employer retirement plan may add more, capped by earnings and by the federal poverty line.

ABLE accounts exist because of the SSI resource limit. Supplemental Security Income cuts off at $2,000 in countable resources, and an ABLE balance up to $100,000 does not count.

How this gets tested

You'll usually find items in one of four places.

• Product identity: which products are municipal fund securities, and why a variable annuity is a security while a fixed annuity is not.
• Control: the 529 owner controls the account and the beneficiary does not, while the ABLE beneficiary is the owner.
• Cost and timing: the surrender charge schedule, the age 59 1/2 penalty, and direct-sold against adviser-sold fees.
• Tax: qualified withdrawals escape federal tax; non-qualified withdrawals cost income tax plus 10%, both on the earnings only.

A 529 plan counts as a municipal fund security because a state issues it, not because it holds municipal bonds. Most 529 portfolios hold ordinary stock and bond funds, and the exam tests that mismatch every time.