What Fees Do You Pay in a Roth IRA?

Roth IRAs are a great way to save for retirement, but they have costs

A Roth individual retirement account (Roth IRA) can be a powerful vehicle when it comes to saving for retirement. Though the money that you put into a Roth IRA is taxed (unlike a traditional IRA), you get tax-free withdrawals in retirement—even on your earnings.

Roth IRAs aren’t free, though. All of the major providers charge fees on these accounts. These fees come in various forms: account maintenance fees charged by your provider, transaction fees for trading via your Roth IRA, and—for most Roth IRAs—mutual fund expense ratios and sales loads.

In this article, we’ll take a look at these fees and how they might affect your retirement savings.

Key Takeaways

  • For many investors, a Roth individual retirement account (Roth IRA) is a great way to save for retirement. But these accounts aren’t free.
  • There are three main types of Roth IRA fees: account maintenance fees, transaction fees and commissions, and mutual fund expense and load ratios.
  • Even a 0.1% difference in fees can have a large impact on the eventual value of your investment portfolio, so it pays to shop around for the lowest fees.

How Much Does a Roth IRA Cost?

For many investors, a Roth IRA is a great way to save for retirement. Though you have to pay tax on your contributions to your Roth IRA, you won’t pay any tax when you take this money out—the opposite arrangement to a traditional IRA. If you think that you’re going to be in a higher tax bracket in retirement than you are now, that’s a great deal. Even if you aren’t, you’ll still receive tax-free withdrawals from your Roth IRA. And since there are no required minimum distributions (RMDs), if you don’t need the money, you can leave your Roth alone and pass it to your beneficiaries.

There are some costs associated with having a Roth IRA, though, and these can eat into your retirement savings. We’ve covered these costs in our guide to Roth IRA fees, but we’ll summarize them here. In general, you’ll come across three primary types of Roth IRA fees:

  • Account maintenance fees. Some Roth IRA providers charge a monthly or annual account maintenance fee (sometimes called a custodial fee). The fee—and the dollar amount that you’ll pay—should be disclosed in your account paperwork. If your provider charges an account maintenance fee, you might pay $25 to $50 per year. However, many of today’s banks, brokerages, investment firms, and even mutual funds no longer charge a fee. 
  • Transaction fees and commissions. Many Roth IRA providers give you the option to trade stocks and exchange-traded funds (ETFs). However, each time that you buy or sell an investment, you might owe a transaction fee or commission. Transaction fees vary greatly—and they depend on what you’re trading—but they typically range from $5 to $20 per trade. If you do a lot of trading through your Roth IRA, these can add up quickly.
  • Mutual fund expense ratios. Mutual funds are the most common asset held in a Roth IRA, and they come with costs of their own. Most mutual funds have expenses that represent the cost of operating the fund, and these can range from as low as 0.25% (usually for passive index funds) to as high as 2% or more. The average expense ratio across all mutual funds is about 0.50%.

None of these fees will normally affect whether it is worthwhile for you to have a Roth IRA. However, they can make a significant difference to the value of your portfolio when you retire. That’s why it’s important to minimize fees wherever you can.

Make sure that you pay attention to your IRA’s fees. Even small differences can add up over time.

Roth IRA Fees and Retirement

Even a small difference in fees can have a big impact on your balance over time. So it’s important to pay attention to these fees and minimize them whenever possible. This is particularly important with Roth IRAs (and similar retirement accounts), because you will normally hold these accounts for a long time. This means that the fees you pay will affect the compound interest that you receive, and thus the ultimate value of your IRA.

There are many different types of Roth IRA now available, and many ways of setting up the investments that they contain. This makes it difficult to estimate the overall effect of fees on the “average” Roth IRA. But one way to answer this question is to consider the extent to which fees might erode your nest egg.

The U.S. Securities and Exchange Commission (SEC) has done some research on how fees can affect your investment portfolio. This research suggests that over the course of 20 years, fees of 0.5% can reduce the value of your portfolio by $10,000 compared to the same portfolio with fees of 0.25%. The difference is even starker for accounts that charge a 1% fee. In that case, the account owner would see a reduction of nearly $30,000 in value over the same period.

This is why with Roth IRAs, it really pays to look at the small print and shop around for the best deal.

Do Roth individual retirement accounts (Roth IRAs) have monthly fees?

Sometimes. Some Roth individual retirement account (Roth IRA) providers charge a monthly or annual account maintenance fee (sometimes called a custodial fee). The fee—and the dollar amount that you’ll pay—should be disclosed in your account paperwork. If your provider charges an account maintenance fee, you might pay $25 to $50 per year.

What are the average fees for an IRA?

IRAs are legally allowed to charge annual maintenance fees. Many are $30–$50, while others are as low as $20 or as high as $200 or more. The annual fee may be waived on larger accounts, and some IRAs are set up with no annual maintenance fees. However, many of today’s banks, brokerages, investment firms, and even mutual funds no longer charge a fee.

Do some investments carry higher fees?

Some asset classes gravitate toward high fees, and some assets are geared toward low fees. Indexed products—such as exchange-traded funds (ETFs) and index mutual funds—usually carry relatively low fees and are a good choice for value-conscious investors. There are often alternatives (e.g., multiple S&P 500 index funds) available from several providers to evaluate. Keep an eye on the fees that your investments charge, since those fees will take a bite out of your savings over time.

What is a mutual fund expense ratio?

An expense ratio reflects how much a mutual fund or an ETF pays for portfolio management, administration, marketing, and distribution, among other expenses. You’ll almost always see it expressed as a percentage of the fund’s average net assets (instead of a flat dollar amount).

The Bottom Line

Roth IRAs can be a powerful tool for investing for your retirement, but they aren’t free. It pays to shop around and look for providers that charge reasonable fees—including commissions. And keep in mind that many brokerages offer commission-free trading on certain funds. If you plan to buy and sell frequently in your Roth IRA, that could be a huge perk.

No matter which IRA provider and investments you choose, keep an eye on the fees. If they’re eating away at your returns, it’s probably time to make some changes to your Roth IRA. If you’re not sure what to do, hiring a financial advisor can help.

Article Sources
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  1. Internal Revenue Service. “Traditional and Roth IRAs.”

  2. Internal Revenue Services. “Retirement Topics — Beneficiary.”

  3. CNBC. “These Are the Best Roth IRAs for Growing Your Money Tax-Free.”

  4. Investment Company Institute. “Trends in the Expenses and Fees of Funds, 2020,” Page 3.

  5. U.S. Securities and Exchange Commission. “How Fees and Expenses Affect Your Investment Portfolio,” Page 1.

  6. Charles Schwab. “ETF vs. Mutual Fund: It Depends on Your Strategy.”

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