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.
Individuals interested in a Roth IRA should focus on providers that have the lowest fees for those investment that match their investment goals.
Roth IRA Fees
There are three primary fee types you will find with a Roth IRA.
Account Maintenance Fee
An account maintenance fee is a fee charged to account holders just to have an account open with the provider. The company is having you directly pay for some of their overhead expenses incurred by providing their services. This fee is usually included in the information listed before you open your account with the dollar amount you will be charged every month.
Some companies that target very specific or exotic types of investments may be able to justify paying an account maintenance fee. Generally they are 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 of the Roth. This charge isn’t something directly charged to you by the Roth IRA provider. Instead each mutual fund you invest in while 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 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 commission to the brokerage firm. Commissions vary greatly, but most popular providers charge between $5 and $20 per trade.