Roth IRA accounts are considered one of the most popular ways to save for retirement. Contributions to a Roth account come from money that has already been taxed, so there are no additional taxes during the investment period or when withdrawing funds from the account during retirement. However, fees related to a Roth IRA may reduce the amount you will have in the future.
Advantages of a Roth IRA
Roth IRA accounts are the only retirement accounts that do not incur taxes when you withdraw your earnings in retirement because the money you contribute has already been taxed. Like other qualified retirement accounts, such as 401(k) accounts and traditional IRAs, there are no taxes due on investment earnings or gains in a Roth IRA while they remain in the account. Anytime you receive earnings or sell a stock for a profit, you can reinvest those earnings into something new.
Types of Fees Related to a Roth IRA
The government does not impose direct fees on Roth IRA accounts. Financial institutions may charge account maintenance fees and transaction fees. Mutual funds and exchange-traded funds (ETFs) may charge sales fees and expense ratios. The best way to minimize fees with a Roth IRA is to read the fine print and compare the options available to you.
Account Maintenance Fees
Some brokerage firms charge annual fees for IRA accounts, although there may be ways to waive those fees. For example, Vanguard charges a $20 annual fee if you have less than $10,000 in a Roth IRA, although you can waive the fee if you enroll in electronic delivery service. All annual fees at Vanguard can be waived if your account balance is more than $50,000. Some brokerage firms may not charge any fees at all on Roth IRA accounts that allow you to direct the investments yourself or use a robo-advisor, while some robo-advisory firms may charge a fee, typically as a percentage. Most brokers, such as Fidelity and Schwab, will charge an annual flat fee or percentage if you use their investment advisors for guidance or to manage funds in a Roth IRA.
Transaction Fees
Transaction fees relate to brokerage fees. Brokerage fees have undergone numerous changes over the years. Recently, many investment apps, such as Robinhood, and even major brokers like E-Trade, Schwab, and TD Ameritrade, have offered most commissions at $0 per trade. Transaction fees may be $0 on many or most U.S. stocks, options, or mutual funds (ETFs) in a Roth IRA. However, you may still pay transaction fees on: options contract fees, direct securities, futures, foreign stocks and securities, and secondary trades of certificates of deposit and corporate and municipal bonds, as well as any trades that assist the broker.
Expense Ratios
For a mutual fund and an exchange-traded fund (ETF) in a Roth IRA, the expense ratio is the annual fee you pay for managing the fund and administration. The average expense ratio in 2020 was 0.54%, according to Vanguard. Generally, passively managed funds have lower expense ratios than actively managed funds. Like commissions, these fees have decreased over the years. Many ETFs now offer expense ratios below 0.50%, or $50 per $10,000 invested. If you find a fund you like for your Roth IRA that charges fees higher than 1% annually, keep searching – you’re likely to find a similar fund with lower fees.
Fees
Selling
The sales charge on a mutual fund is a one-time commission for some mutual funds, imposed by the fund company when buying or selling a mutual fund. Sales charges vary widely, but are generally capped at 8.5% or less, according to rules set by FINRA. Most brokerage firms offer no-load mutual funds or no-fee mutual funds as an option for your Roth IRA account.
Early Withdrawal Penalty Warning
You can withdraw your contributions (known as the cost basis) in a Roth IRA at any time without penalty. On the other hand, investment earnings can only be withdrawn tax-free and penalty-free if they are considered qualified distributions. If you take non-qualified distributions from investment earnings in a Roth IRA account, an additional 10% tax penalty will be imposed on top of the regular tax on the amount withdrawn.
For Roth IRA distributions to be considered qualified for penalty-free treatment, you must be over the age of 59 and a half and the account must have been open for at least five years or meet certain conditions, such as being permanently and totally disabled. The penalty tax may also not apply if Roth IRA distributions are used for situations like:
- Buying, building, or rebuilding a first home worth up to $10,000
- Unreimbursed medical expenses exceeding 7.5% of adjusted gross income
- Seizure by the IRS
- Health insurance during unemployment for more than 12 weeks
- Adoption or birth expenses up to $5,000
How to Reduce Your Roth IRA Fees
The best way to reduce your Roth IRA fees is to read the fine print. When searching for brokers to hold your account, identify their annual maintenance fees and transaction fees. Look for investments in no-load mutual funds, stocks, and exchange-traded funds (ETFs) with no fees and low expense ratios.
Fees can erode your returns over time. For example, let’s assume you roll over a $25,000 401(k) balance into a Roth IRA and then achieve returns of 7% annually for 30 years before retirement. That $25,000 would grow to over $190,000. If the average fee is 1% over that 30-year period, your balance could drop to about $143,500 – you would lose about $46,500 for retirement due to just a 1% annual fee.
Conclusion
Fees often accompany investment in a Roth IRA account, but you can be smart in choosing your broker and investment options to keep costs down over time. The lower your fees, the better off you’ll be in retirement.
Frequently Asked Questions (FAQs)
How are Roth IRA fees determined?
Roth IRA fees are determined by the financial broker and the investments you choose. Each financial institution has a fee structure, and mutual funds and exchange-traded funds (ETFs) impose varying fees.
How do fees compare between a Roth IRA and a 401(k) account?
Investment options in your 401(k) may have higher fees due to restrictions on specific investments. Mutual funds are the most common, which come with specific expense ratios and higher investment minimums.
Can you have a no-fee Roth IRA account?
You can certainly reduce fees significantly, and with more money in your account, the institution may be willing to waive some maintenance fees. You might be able to invest only in U.S. stocks to incur lower or no fees, but this also means less diversification in your portfolio. Every benefit carries some type of risk.
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Sources:
Vanguard. “Vanguard Annual Account Service Fees.”
E-Trade. “Brokerage Account.”
Vanguard. “Expense Ratios: What They Are and How They Work.”
Schwab. “Mutual Fund Fees and Costs.”
Investor.gov. “Sales Charge or Load.”
IRS. “Topic No. 557 Additional Tax on Early Distributions From Traditional and Roth IRAs.”
IRS. “Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs).”
Source: https://www.thebalancemoney.com/what-roth-ira-fees-do-i-owe-5270461
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