Can Roth IRA Fees Impact Your Investment Returns?

One of the most popular retirement savings plans in the United States, a Roth IRA is an individual retirement account (IRA) that offers specific tax benefits to its investors. There are primarily two kinds of IRAs - the traditional IRA and the Roth IRA. Both these accounts are tax-advantaged accounts that allow you to save for retirement and build a stable financial future. However, these accounts differ from one another when it comes to their taxability. A traditional IRA is funded from your pre-tax dollars whereas you contribute your after-tax dollars to a Roth IRA. Your withdrawals are taxed in retirement when it comes to a traditional IRA, however, you can make tax-free withdrawals in a Roth IRA provided you fulfill certain conditions mandated by the Internal Revenue Service (IRS). Additionally, you have to take mandatory Required Minimum Distributions (RMDs) after the age of 72 in a traditional IRA. On the other hand, your withdrawals are not subject to compulsory RMDs if you own a Roth IRA account.

The ability to make tax-free withdrawals is one of the most important reasons why a lot of people prefer investing in a Roth IRA. You can live comfortably in retirement without having to worry about those pesky tax issues. That said, just like any other investment, even a Roth IRA has certain fees that you may incur from time to time. Consider Roth IRA fees as a cost of investing but understand that if you are not careful, it can potentially affect your return on investment (ROI). Consult with a professional financial advisor who can help you understand the different Roth IRA fees that you may come across while investing in a Roth IRA account.

Different Kinds of Roth IRA Fees

There are several kinds of Roth IRA fees that you may incur during the course of your investment. These are:

1. Roth account opening fee:

Though there is no charge when you open a Roth IRA account, the precise fee may depend on each plan administrator. You can consult with your plan provider to know the exact charges that you may incur and then make a decision. For example, even though Fidelity does not charge any account opening or transaction fee, it does levy a 0% to 0.50% maintenance fee. Similarly, Edward Jones charges a $40 annual maintenance fee but does not charge any account opening fee to its Roth IRA account holders.

2. Account maintenance fees:

As the name suggests, the account maintenance fee is charged by your plan provider for maintaining your account on a monthly or annual basis. It is also known as the custodial fee. The fee typically varies between $25 and $50 annually. That said, a lot of Roth IRA custodians such as banks, unions, brokers, etc., no longer charge an account maintenance fee. By doing a bit of homework, you can save up on these costs by choosing a plan administrator with minimal or no charges. You also have the option of comparing monthly and annual charges and picking a more cost-effective alternative. Though overall annual fees are lower compared to monthly payments, the latter may be easier on the pocket as you can break down the total fee into small manageable transactions rather than paying the entire fee in one go.

3. Transaction fees and commissions:

You have to pay a transaction fee on every transaction carried out by you or your financial advisor on your behalf such as buying or selling securities. This may also include any commission on the transaction incurred at the time of trading stocks or Exchange-Traded Funds (ETFs). The transaction fee generally varies between $5 and $20 for every trade. This can be concerning especially if you trade frequently and stocks and ETFs form the major part of your IRA investments. You can reduce the amount you pay in transaction fees by investing in commission-free investments like mutual funds. You can also use a buy-and-hold strategy to lower your transaction fees. Since a buy-and-hold strategy involves investing in securities with a long investment horizon, very few transactions take place over the course of the investment period. This means that the overall expense is considerably lower due to the low volume of transactions.

4. Mutual fund expense ratios:

The mutual fund house charges individual expense ratios on mutual funds. Whether the expense ratio is on the higher or lower end depends on how actively traded the fund is. If the mutual fund is more actively traded, the mutual fund expense ratio will be on the higher side. Each mutual fund has a fund manager who manages the pooled money taken from multiple investors and buys and sells securities such as equity and debt to earn returns for the investors. The aforesaid costs including the cost of the fund manager's services are covered by the mutual fund expense ratio. Typically, expense ratios vary between 0.25% and 2% or more. Passive mutual funds have relatively lower expense ratios compared to actively-traded mutual funds. For example, index funds charge a lower fee compared to active mutual funds as they follow a benchmark index that tracks and mimics the index’s performance.

5. Mutual fund sales load:

Apart from the expense ratio, mutual funds also charge the sales load or sales fee. Every time you purchase or sell a share, you incur the sales load. This is a one-time fee that is paid only once unlike other kinds of charges. There are two kinds of sales loads:

• Front end load: This is charged at the time of buying shares.
• Back-end load: A back-end load is incurred at the time of selling shares.

That said, there are certain no-load mutual funds available as well wherein you do not have to pay any charges at the time of buying and selling shares within a mutual fund.

What impact do the Roth IRA fees have on your returns?

Any investment expense or fee charged at the time of purchase or sale of investment directly impacts your returns. The lower the fee, the more potential for maximizing your returns; the higher the fee, the lower the returns for you. Moreover, your returns are affected by several other factors like early withdrawals, inflation, market volatility, and more. Though some of the aforesaid factors may be out of your control, you can control the fees paid by you by choosing the right IRA plan provider. As per the U.S. Securities and Exchange Commission (SEC), you can incur a loss of $30,000 or more if you shell out a 1% fee for 20 years rather than a 0.5% fee. Similarly, if you pay a 0.5% fee, your portfolio will suffer a loss of $10,000 over the same time period compared to if you had paid 0.25% in fees. 

Thus, it is critical that you select the right custodian for your Roth IRA. The numbers may seem small for each transaction but taken together, may turn substantial over time. Hence, it is important that you choose the most economical option having the lowest fees.

How can you reduce your Roth IRA fees and boost your returns?

There are a number of investment instruments you can choose to invest in your Roth IRA such as stocks, ETFs, bonds, money market funds, mutual funds, Certificates of Deposits (CDs), etc. A diverse mix of asset classes can help you generate inflation-beating returns and fetch you the best results.

You can also take certain steps to boost your Roth IRA returns:

1. Choose low-cost investments:

The investment fee tends to vary from investment to investment so if the cost is a concern for you, you can go for low-cost investments. As discussed earlier, the fee tends to be on the higher side for active funds compared to passive funds. To reduce your costs, you can pick index funds over equity mutual funds. That said, it is important to understand that equity funds can generate higher returns compared to index funds over a long investment horizon even if the fees are more. Conversely, index funds are tied to the benchmark index they follow, meaning if the benchmark does not perform well, you may not be able to generate high returns even if you have paid lower fees.

2. Engage the services of a financial advisor:

Seeking professional advice can go a long way toward ensuring you have enough for retirement. A financial advisor helps choose the right combination of investments, manage them, and makes the most of changing market conditions by investing in the right options at the right time. He can also offer advice based on the prevalent economic trends in the country, such as investing in bonds rather than stocks when the country is undergoing a period of inflation.

That said, you must understand that even though financial advisors can help optimize Roth IRA fees, they do charge a fee for providing their services as well. There are primarily two kinds of advisors - fee-based or commission-based advisors. The former use a fixed fee model wherein they are paid as per every consultation or on a monthly, quarterly or annual basis. On the other hand, commission-based advisors charge a commission for every investment they sell or recommend you buy. Assess the pros and cons of each and decide which kind of advisor would best serve your needs.

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3. Choose the right custodian:

You can open a Roth IRA account with a bank, broker, mutual fund house, credit union, or life insurance company. However, the costs vary for each institution. Carry out a Roth IRA fee comparison and choose an option that is the most economical for you. More importantly, your choice of a custodian will determine the kind of investments you can invest in. For example, if you open an account through a credit union and life insurance company, you can invest in low-risk investments such as bonds, CDs, money market accounts, etc. However, if you choose a broker or mutual fund company and open your account with them, you have access to equity options like stocks, ETFs, mutual funds, and more.

4. Invest with a long-term horizon in mind:

Choosing to invest for the long-term has several benefits. A long investment term helps minimize risk and allows you to ride out market highs and lows. You have the scope for making up for your loss suffered due to market volatility over a long investment horizon. Doing so negates the need for frequently adjusting your investment portfolio. If you refrain from frequent buying or selling of shares, you would automatically reduce the transaction costs, commissions, sales loads, etc., of your investments. Having a long-term investing approach will allow you to keep your Roth IRA fees low. Ensure that you do not engage in panic selling when markets go down. Seek financial advice from a professional who can help you make informed decisions and does not let your emotions overpower you when it comes to investing.

To conclude

At the time of planning for retirement, you need to consider the impact of different fees on your investments and final returns. Apart from Roth IRA fees, other factors such as the rate of inflation, market volatility, the different kinds of investments chosen by you along with the amount invested and duration of the said investments, and similar factors have a significant impact on your returns. So, while it is recommended that you choose investments and fee structures that can result in low fees but also consider other aspects as well that may be just as critical in ensuring a stable and financially secure retirement.

It is advised that you seek out expert guidance on the matter who can help lower the costs and boost your returns. Reach out to a professional financial advisor in your area who can advise you on how to maximize the benefits of your Roth IRA account. 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.