Can I rollover my 403(b) to a low-cost index fund?
I have an employer sponsored 403(b) retirement account that needs to be moved since I no longer work at the company that provided this account. I am considering opening either a mutual fund IRA or a low-cost index fund. I've already meet with a financial advisor who recommends mutual funds, but I have been reading good things about low-cost index funds. What do you think is the better option? Can I roll my money over to a low-cost index fund without being taxed?
Once you roll the money into an IRA, you can hold a number of different investments from mutual funds to ETFs to individual stocks to bonds, etc. My preference is to use ETFs for my clients for the reasons you mentioned in your question. As a fundamental analyst, I want to hold the least expensive investments that accomodate my investment strategy. Many mutual funds under-perform their respective benchmarks and yet cost so much more than indexed ETFs. With the wide variety of ETFs in the market place today, an investor can get the allocation they need without having to pay high expenses to mutual fund companies. There are many reasons why advisors recommend mutual funds, but if you work with an advisor that is an experienced investment manager, most would prefer ETFs.
Low-cost index funds come in both mutual fund format and ETF (Exchange Traded Fund) format. Both should be available in a Rollover IRA. Most discount brokerage firms, such as Schwab, TD Ameritrade, Fidelity, and Scottrade, will allow you to purchase most types of mutual funds and ETFs.
As long as you are moving your assets directly from the 403(b) into a Rollover IRA, you should not have any tax issues. Tax issues arise when you actually take a hold of the money after it leaves the 403(b). Make sure your rollover is a trustee-to-trustee (custodian to custodian) rollover. Most discount brokerage firms also offer incentives for rolling over workplace retirement accounts.
The short answer is yes, you can and yes, you should consider it. Index funds are a great low cost way to achieve returns. We use a lot of index funds in our portfolios for that reason. There a multitude of studies that show that very few actively managed funds outperform index funds in the long run. That being said, all index funds are not created equal. Look at the cost: I’ve seen fees run from 0.05% to 1.56% on an S&P 500 fund, so shop around. Second, be sure to diversify. You want either a total stock market index, or a combination of big (S&P 500), small, international, and maybe emerging markets, as well as bonds. In other words, just because you own 500 big stocks, you’re not diversified. You want big, small, domestic, international, stocks, and bonds. But all in all, saving money on fees is a good idea.
The other answers are great. But one caveat.
Lots of 403(b) plans use insurance based products (annuities, yuck!) with surrender charges.
Make sure you have no surrender charges pending before you transfer to an IRA. You don't want to waste money.
Hope that helps!