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ETF's / Custodial Account


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Can a 403(b) (non -church) Plan invest in ETFs?  It is my understanding that some ETFs are considered mutual funds as long as it is a Registered Investment Company under Section 851(a) of the code.  Can anyone confirm with a site? 

Thanks

 

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The best answer which anyone can give you is this:  Any entity that is a registered investment company under IRC Section 851(a) (and many/most ETFs are) is eligible to be held in a 403(b)(7) custodial account.  Not really possible to provide a citation, but if you pull the prospectus for a couple of ETFs you likely will find in the tax disclosure that they are intended to be 851(a) tax RICs.

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  • 1 year later...
On 7/3/2019 at 10:57 AM, jpod said:

The best answer which anyone can give you is this:  Any entity that is a registered investment company under IRC Section 851(a) (and many/most ETFs are) is eligible to be held in a 403(b)(7) custodial account.  Not really possible to provide a citation, but if you pull the prospectus for a couple of ETFs you likely will find in the tax disclosure that they are intended to be 851(a) tax RICs.

The citation is IRC sec. 403(b)(7)(C). Some ETFs are structured as IRC sec. 851(a) RICs, and so would qualify, but others are structured as partnerships or grantor trusts, and so would not. Here is a link to an NTSA article that explains why many sponsors would consider even those ETFs that are RICs, and therefore could be included in a 403(b), as inappropriate: https://www.ntsa-net.org/are-etfs-and-self-directed-brokerage-accounts-available-403b-plans. Basically, the continuous daily pricing and exchange trading would put pressure on the platform and raise costs, I think.

 

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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