What Roth IRA Fees Do I Pay?

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 to minimize them.

Types of Roth IRA Fees

For many investors, a Roth IRA is a great way to save for retirement. It offers numerous benefits:

• You can contribute to a Roth IRA at any age—young or old—provided you meet the income requirements.
• Though there's no upfront tax break, you get tax-free withdrawals in retirement—even on the earnings.
• 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.

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 deposited with the firm (e.g., if you have multiple accounts).

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 fees. 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 (ER), 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.

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 0.50%.

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.

The Bottom Line

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.

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 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, a financial advisor can help.