Having a Roth IRA isn't free. The costs—including maintenance fees, commissions, and expense ratios—can add up quickly. Here's a quick look at the Roth IRA fees you might be paying, and what you can do minimize them.
- Roth IRAs have several costs, including account maintenance fees, commissions, and expense ratios.
- Even a small difference in fees—a fraction of a percent—can dramatically reduce the size of your nest egg.
- A study found that high fees increase the chance you’ll run out of money in retirement, so it pays to keep the fees to a minimum.
Types of Roth IRA Fees
For many investors, a Roth IRA is a great way to save for retirement. They offer numerous benefits:
- You can contribute to a Roth IRA at any age—young or old—provided you meet the income requirements.
- While there's no upfront tax break, you get tax-free withdrawals in retirement—even on the earnings.
- There are no required minimum distributions. If you don't need the money, you can leave your Roth alone and pass it to your beneficiaries.
Despite all the benefits, there’s something that can keep you from taking full advantage of a Roth: the fees. 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.
In general, you'll come across three primary types of Roth IRA fees:
- Account maintenance fees
- Transaction fees/commissions
- Mutual fund expense ratios and sales loads
Account Maintenance Fee
Some Roth IRA providers charge a monthly or annual account maintenance fee (sometimes called a custodial fee). The fee—and the dollar amount you'll pay—should be disclosed in your account paperwork.
If your provider charges an account maintenance fee, you might pay between $25 and $50 per year. However, many of today's banks, brokerages, investment firms, and even mutual funds no longer charge a fee.
Even if your provider does charge the fee, you may be able to avoid it if you have a certain minimum balance in your IRA, or if you have a minimum amount of assets on deposit with the firm (e.g., if you have multiple accounts).
Make sure you pay attention to your IRA’s fees—even small differences can add up over time.
Transaction Fees and Commissions
Many Roth IRA providers give you the option to trade stocks and exchange traded funds (ETFs). ETFs are funds that hold a basket of securities that track an index, such as the S&P 500. However, each time 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 between $5 and $20 per trade. If you plan to do a lot of trading in your account, rather than take a buy-and-hold approach, these fees become especially important.
Still, there are ways to minimize your transaction frees. Some IRA providers, including Vanguard, Fidelity, and Charles Schwab, offer a range of commission-free ETFs and mutual funds.
Keep in mind that only certain ETFs and mutual funds are included in the "commission-free" trading lists. If commission-free trading is important to you, be sure to review your provider's list before you place any trades.
Mutual Fund Expense Ratios and Sales Loads
Mutual funds are the most common asset held in a Roth IRA. Mutual funds contain multiple securities or stocks but are actively managed by a professional portfolio manager. As a result, they can cost you in two ways:
- Expense ratios
- Sales loads
Mutual Fund Expense Ratios
Mutual funds have expenses that represent the cost of operating the fund. These operational costs are always expressed as an annual percentage of assets invested in the mutual fund. They're known as the fund’s expense ratio (or the management expense ratio).
If the fund handles $100 million in assets and it collects $1 million in fees and other expenses, then its expense ratio is 1%. That means you'll pay $10 a year for every $1,000 you have invested in the fund. The money comes straight out of your investment in the fund.
The average expense ratio for mutual funds in 2018.
On the whole, mutual fund expense ratios 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 0.55%.
Of course, lower is better. It means more of your investment dollars are actually going into investments and earning for you. If you're paying too much, find out if your provider offers a similar fund for less, or if there's another (cheaper) fund that matches your investment goals.
Mutual Fund Sales Loads
A fund’s expense ratio represents your cost of owning the fund. In contrast, a load on a mutual fund is a sales fee or commission you pay when you buy and sell shares. They are one-time charges—not ongoing expenses.
If you pay the load when you buy shares, it's called a front-end load. If the fee comes when you sell shares, it's a back-end load. No matter when you pay the load, it can really erode your returns—and profits. And the fund will charge the load regardless of how it performs.
The good news is that some mutual funds don’t charge any sales commissions whatsoever. These are called no-load mutual funds. Many of the same firms that offer commission-free ETF and mutual fund trading also offer a variety of no-load mutual funds.
Often, shares in no-load funds can be sold or redeemed only after you've owned the fund for a certain amount of time. If you're a short-term investor, pay attention to the fine print.
Cost of a Mutual Fund Load
So how much will a load really cost you? Here's a hypothetical example.
Let’s say you’re 22 years old and want to invest $5,000 in your Roth IRA every year in a mutual fund that charges a 3% front-end load. Each year, you have $4,850 of your investment working for you instead of the full $5,000, because you lose $150 each year to the load fee.
Assuming an 8% rate of return on your $4,850 investments each year, your nest egg would be worth about $1.86 million when you reach 65 years old. You would have paid a total of $6,450 in load fees.
That doesn’t sound too bad, right? But here’s the thing. If you had invested in a no-load mutual fund and had the entire $5,000 per year working for you, your nest egg would be worth $1.92 million—a difference of nearly $60,000.
The Bottom Line
According to data from the Big Picture app, the chances that you’ll run out of money during retirement are as follows:
- 9% if you pay 0.05% in fees
- 17% if you pay 1%
- 29% if you pay 2%
- 50% if you pay 2.5%
Fees can really erode your retirement nest egg if you’re not careful. It pays to shop around. 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.
Also, choose your investments wisely. For example, it might make sense to pick a low-cost index fund instead of an expensive mutual fund.
No matter what 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, a financial advisor can help.