There's no such thing as a free lunch -- or a free retirement account. According to Consumer Reports, an investor might pay anywhere from $3,531 to $14,529 in fees on a $50,000 retirement account investment over 20 years. Understanding the fees that banks, brokerage houses and mutual fund companies charge to manage your IRA can help you make smart investment choices.
The Cost of Getting Started
Many institutions charge a fee to open your account. Establishing a new IRA, or rolling over your 401(k) account from a former employer, can cost you anywhere from less than $10 to several hundred dollars in new account fees. These new account setup fees cover such expenses as the institution's cost of processing your account application, verifying your identity, assigning your account number, depositing funds into your account, setting up your online access and the like.
The Cost of Maintenance
Banks, brokerage houses and trust companies charge maintenance fees, also known as custodial fees, for holding your account. They cover the costs associated with keeping your account active. Maintenance fees are ongoing over the life of your account. They may be expressed as a flat annual fee or calculated as a percentage of your account balance. These fees vary by provider; some providers waive them if you maintain a specified minimum balance in your account or if you agree to accept online statements instead of printed, mailed statements.
The Cost of Trading
Like other stock market investments, your IRA makes money when you buy and sell investments. Many IRA companies charge brokers' commissions and trading fees, known as "loads," on these transactions. A load can consume 3 percent to 6 percent of every trade your broker makes. Some investors elect to purchase "no-load" mutual funds to save money on these transaction fees. With no-load funds, the investor researches securities, decides which ones to purchase and buys those shares directly from a brokerage or mutual fund company.
The Cost of the Expense Ratio
Account management costs and other miscellaneous fees are rolled into an IRA's expense ratio. The expense ratio is a percentage that is applied to your total account holdings and deducted from your account. Expense ratios are generally lower for passively managed accounts, such as indexed mutual funds, than they are for actively managed accounts, where a fund manager selects the fund's holdings and buys and sells them in an effort to maximize shareholders' profits. An expense ratio generally ranges from 0.1 percent to 2 percent or more.
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