How Roth IRA Fees Affect Your Return on Investment
The Roth IRA is one of the most widely used retirement vehicles in the U.S. An Individual Retirement Account (IRA) has two types – the traditional IRA and the Roth IRA. The two accounts are similar in many ways. They are both tax-advantaged accounts that can offer you financial security in retirement. However, they differ in their taxability. The traditional IRA is funded from your pre-tax dollars and taxed in retirement. The traditional IRA also has mandatory Required Minimum Distributions (RMDs) after the age of 72. All of your withdrawals after the age of 59.5 are taxed according to the tax slab you fall into. On the other hand, a Roth IRA is funded from your after-tax dollars, so your withdrawals in retirement are not taxed. This is also one of the reasons why your Roth IRA withdrawals are not subject to mandatory RMDs.
The tax-free withdrawals are one of the primary reasons why most people prefer a Roth IRA. The account helps them live a comfortable and financially protected retirement, free from tax worries. However, the retirement account, just like any other investment, does have some fees. Roth IRA fees may seem ordinary and an inevitable cost of investing. However, it has the potential to affect your return on investment. If you wish to know more about the different kinds of fees associated with a Roth IRA account, reach out to a professional financial advisor who can guide you on the same.
What are the different types of Roth IRA fees?
A Roth IRA can charge the following types of fees:
1. Account maintenance fees:
Also known as the custodial fee, the account maintenance fee is a type of charge that the plan provider charges for your account's monthly or annual maintenance. If charged, the account maintenance fee can range between $25 and $50 annually. However, a lot of banks, unions, brokers, etc., do not charge any account maintenance fee anymore. So, you will be able to save up on these costs as long as you make a thorough Roth IRA fee comparison and pick a plan administrator with minimal or no charges. You can also compare the monthly and annual charges and select a more cost-effective option. In most cases, yearly fees are lower than monthly payments. However, making monthly payments may be more pocket-friendly as you can break down the total into small manageable transactions.
2. Transaction fees and commissions:
The transaction fee is charged on each of your transactions, such as buying or selling securities. You may have to pay a commission on the transaction when you trade stocks or Exchange-Traded Funds (ETFs). This could be a fixed fee or a commission based on the amount of the transaction. For every trade, the transaction fee can ideally lie between $5 and $20. This can be particularly alarming for you if you trade frequently and the major part of your IRA assets includes stocks and ETFs. However, you can look for commission-free investments, such as mutual funds and ETFs. Another way to enjoy a low fee Roth IRA is to follow a buy and hold strategy. A buy and hold strategy refers to a long-term approach of investment where you invest in a security with a long investment horizon. Since there are very few transactions, the overall expense incurred on every transaction is considerably low.
3. Roth account opening fee:
Ideally, there is no opening charge to start a Roth IRA. However, the precise Roth IRA fees can depend on each plan administrator. So, it is best to discuss this with your plan provider and then make a choice. For example, if you are wondering, “does fidelity charge fees for Roth IRA” you should know that currently, Fidelity does not charge any account opening or transaction fee. However, it charges a maintenance fee of 0% to 0.50%. Likewise, Edward Jones does not charge any account opening fee, but it charges $40 annually on maintenance.
4. Mutual fund expense ratios:
Mutual funds have individual expense ratios that are charged by the fund house. The more actively-traded the fund, the higher the expense ratio can be. Mutual funds take money from multiple investors and invest it further in securities like equity and debt. Every mutual fund has a fund manager who manages the pooled money and buys and sells securities to earn returns for the investors. These costs and the fund manager's services are covered by mutual fund fees, such as the expense ratio. Expense ratios can usually range between 0.25% and 2% or more. Passive mutual funds can have relatively low expense ratios. For instance, index funds only follow a benchmark index and aim to track and mimic the index’s performance. As a result, their fees are lower than active mutual funds.
5. Mutual fund sales load:
Mutual funds charge another fee known as the sales load or sales fee. The sales load is levied every time you buy or sell shares. Unlike other types of charges, this is a one-time charge that you only pay once. Three are two types of sales loads – the front end load and the back end load. The former is charged when you buy shares, and the latter is charged when you sell shares. However, you can also find no-load mutual funds that charge zero charges on buying and selling shares within a mutual fund.
How can the Roth IRA fees affect your returns?
The fee or any other expense of investment directly impacts your returns. The lower the fee, the more you can maximize your returns and vice versa. In addition to this, several other aspects also affect your rates of return, such as inflation, market movements, early withdrawals, and more. While some of these may not be in your control, fees can be controlled to some extent by selecting the right IRA plan providers. According to the U.S. Securities and Exchange Commission (SEC), if you pay fees amounting to 1% for 20 years, your portfolio can suffer a loss of $30,000 or more than if the same portfolio is levied with a fee of 0.5%. Additionally, a charge of 0.5% can reduce the portfolio’s value by $10,000 than 0.25% in fees.
This is why the company you select for your Roth IRA can make a massive difference to your overall earnings. While these numbers may seem small when levied on a single transaction or investment, they can turn into significant numbers over time. Therefore, it is very important to make sure that you pick the lowest option with the lowest fees.
What can you do to lower the fees on your Roth IRA and increase its rate of return?
Your Roth IRA is made up of a combination of investments, such as stocks, bonds, mutual funds, ETFs, etc. Therefore, the return from your Roth IRA will be a cumulative return on all of these investments. The best selection of assets and a no-fee Roth IRA can fetch you the best results.
You can also do the following things to enhance your returns:
1. Hire a financial advisor:
A financial advisor can be instrumental in ensuring that you get your money’s worth from investing. Financial advisors are professionals in charge of managing your investments. They can guide you in picking the right combination of assets for your Roth IRA. They can also help you choose the right IRA providers, so you pay a minimal fee. In addition to this, financial advisors can help you make the most of changing market movements and invest in the right options at the right time. A financial advisor can provide you with suggestions as per the economic trends in the country. For instance, bonds may be a better choice than stocks during an inflationary surge.
However, it is important to understand that financial advisors may be able to help you optimize Roth IRA fees. But they may also charge a fee for their services. Financial advisors can charge you money in different ways. You can choose from fee-based or commission-based professionals as per your needs. Fee-based professionals charge a fixed fee that can be paid per consultation, monthly, quarterly, or annually, depending on your association with the advisor. Commission-based professionals charge a commission for every investment they recommend or offer. Make sure to understand the pros and cons of each and pick one that is ideal for your requirements.
2. Pick the right plan administrator:
You can choose credit unions, banks, life insurance companies, mutual fund companies, etc., for your Roth IRA. The costs for each will differ. So, conduct a Roth IRA fee comparison and pick an option that is the least costly. In addition to this, the plan administration you choose will also impact the kind of investments you can put your money in. For instance, credit unions and life insurance companies generally offer low-risk investment options like bonds, certificates of deposits, money market accounts, etc. On the other hand, mutual fund companies and brokers may offer equity options. So, along with the direct fees that are levied on your transactions, your returns will also dictate your ultimate profit.
3. Invest for the long-term:
Picking a long investment term can benefit you in many ways. A long investment term lowers risk and the chance of suffering from a loss due to sudden market highs and lows that can stall your growth. In addition to this, long terms help you ride out market volatility, which removes the need for frequently adjusting your portfolio. Whenever investors are faced with market volatility, they are tempted to buy and sell shares and make changes to their investments. This, in turn, increases the transaction costs, commissions, sales loads, etc., of their investments. So, keeping a long-term approach can be advised if you want a low fee Roth IRA. One method to do so is to avoid panic selling when markets go down and instead rely on the advice of a financial advisor. Keeping emotions out of investing is very important. So, do not make decisions based on fear or peer pressure.
Roth IRA fees can be an essential factor in deciding the fate of your investments and final returns. However, there are other factors at play as well. The rate of inflation, the stock market, the type of investments you choose, the amount you invest, the duration of your investment, and other similar factors all affect your returns. While keeping an eye on the fee structure and picking options that can result in low fees is recommended, it is also critical to look at other aspects.
In addition to this, it can also help to hire a professional financial advisor in your area and get expert guidance on how to lower the costs and enjoy a good return. Use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.
Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. In addition, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.
CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.