Roth individual retirement accounts have the potential to create thousands or even millions of dollars of tax savings through their unique structure. With a Roth, you put after-tax money in, but it grows tax-free so that your entire withdrawal in retirement occurs without being subject to tax. While the Internal Revenue Service won't be getting a piece of your account once the money goes in, your investment manager might be.
No Fee Roths
As of August 2013, many brokerages and investment companies offer Roth IRA accounts without annual maintenance fees. For them, the opportunity to earn commissions, make money off of selling you services and charge other fees makes a fee-free Roth IRA a desirable loss leader. Before rushing out and opening up a no-fee Roth, though, carefully review each company's specific requirements.
Roths with Maintenance Fees
Many mutual fund companies and some other financial services firms offer Roth IRAs with a minimal maintenance fee. Typically, these fees fall between $10 and $50 per year. Sometimes, these fees can be waived by meeting account minimums. On the other hand, paying a fee may also give you access to reduced price trades or to other benefits. While paying a fee usually isn't desirable, there are larger fees that you could end up subject to as a part of your Roth IRA. If spending $20 on a fee saves you $100 in commissions or $1,000 in expense ratios, it's a good investment.
Investment Advisory Fees
If you have your IRA with an investment adviser, you may also be paying a fee that is tied to the size of your account. For instance, if you have a $200,000 balance, and you pay your adviser 1.5 percent for investing and managing it, you're giving up $3,000 a year, every year. If you're getting more value in terms of better returns or your adviser is saving you a great deal of effort, this fee can be a good investment. However, when the fee just costs you money, you may want to consider looking for a different adviser.
Management and Transaction Fees
The investments that you hold in your Roth IRA may also have fees that eat into your return. Many mutual and exchange-traded funds have built-in expense ratios that reduce their returns. For example, if you're holding a fund that returns 6.3 percent per year after a 1.1 percent expense ratio, it's really generating 7.4 percent -- you just aren't seeing it all. If you can switch to a similar fund with a lower fee, you'll end up with a higher net return. When you make the change, though, you may also pay a fee to sell that fund and buy a more efficient one if your account is subject to brokerage commissions.
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