Many banks and investment companies offer Roth IRAs to clients. Some focus on a certain facet, such as the ability to heavily trade stocks or offering certificates of deposit.
One popular option that individuals frequently seek is the no-fee Roth IRA.
What is a No-Fee Roth IRA?
A no-fee Roth IRA is a retirement account that a provider markets as having no fees associated with owning the account. This is done to drive additional clients to the provider. Providers know that once you sign up for a Roth IRA with their service you are not likely to move it in the future.
Unfortunately there is no such thing as a completely fee-free Roth IRA. Providers have expenses and must charge their clients some sort of fee for running the investments inside their retirement accounts. If Roth IRA providers truly charged no fees they would all go out of business. The no-fee Roth IRA is a marketing tool used to get your attention.
All the same, there are big differences in the types of fees you will be charged. Individuals interested in a Roth IRA should focus on providers that have the lowest fees for the types of investments that match their investing goals.
The 3 Types of Roth IRA Fees
These are the three primary types of fees you will find with a Roth IRA.
Account Maintenance Fee
Some providers charge an account maintenance fee just to have an account open with the provider. The company is having you directly pay for some of its overhead expenses. This fee is usually included in the information listed before you open your account, along with the dollar amount you will be charged every month.
If the company targets very specific or exotic types of investments, account maintenance fee may be justified. Generally, it is an unnecessary expense.
Expense Ratio on Mutual Fund Investments
The second fee commonly associated with Roth IRAs is the expense ratio on mutual fund investments inside the Roth. This charge isn’t something directly charged to you by the Roth IRA provider. Instead, each mutual fund you invest in will have an expense ratio that is charged to cover the fund’s expenses.
Expense ratios are always expressed as a percentage of assets invested in the mutual fund. For example, Vanguard’s S&P 500 Index fund (VFINX) has an expense ratio of 0.18%. For every dollar invested in the fund Vanguard keeps 0.18% for its expenses. If you invest $10,000 you’ll pay $18 per year to the mutual fund company.
The average expense ratio across all mutual funds is about 1.0%. Lower is better.
Stock and ETF Trading Transaction Fees/Commissions
In addition to investing in low-cost index mutual funds, many Roth IRA providers give you the option to trade stocks and exchange-traded mutual funds (ETFs). Each time you buy or sell an investment you are charged a transaction fee or commission by the brokerage firm. Fees vary greatly, but most popular providers charge between $5 and $20 per trade, and some offer mutual funds with no transaction fees. If you’re planning to do a lot of trading in your account, rather than taking the buy-and-hold approach to investing, these fees are especially important.