Are There Fees on a Roth IRA?
Roth individual retirement accounts feature tax-free growth of taxed income. As opposed to a traditional IRA, you don't receive a tax deduction for contributing to a Roth IRA. Most IRAs charge some kind of fee. However, a savvy investor can locate fee-free Roth IRAs that put 100 percent of retirement funds to work. Fee-free IRA mutual funds may impose conditions and limitations on investor activity -- for instance, monthly statements that will only be delivered electronically.
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History
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Roth IRAs were introduced in 1997 as an alternative to traditional IRAs. Maximum contributions were at first limited to $2,000 a year. These limits have been raised a number of times, and in 2010, the limit was $5,000 for ages up to 49 and $6,000 for those above 49. As of 2009, contribution limit increases were tied to the consumer price index. Roth IRAs historically have been favored by younger investors with enough time to let tax-deferred investment growth compensate them for the lack of a tax-deduction on contributions.
Investment Vehicles
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The lowest-cost Roth IRAs are bank certificates of deposit and no-fee mutual funds. Internet-based banks typically charge no fees for Roth IRAs that consist of CDs and savings accounts. Mutual funds are investment pools that offer instant diversification in one or more types of investments. An investment manager selects a mutual fund's holdings. You can also set up a Roth IRA brokerage account that allows you to trade securities and commodities directly. Margin accounts and certain option trades are not available in Roth IRA brokerage accounts.
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Maintenance Fees
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There are several types of maintenance fees that companies offering Roth IRAs can charge. Annual custodial fees are general service charges for keeping an account open. Opening and closing fees are one-time charges imposed at start-up or upon transfer of an IRA to another company. If your mutual fund company offers several different funds, it may charge a transfer fee to move your investments around. Since there are many firms that do not charge any maintenance fees, it makes sense for investors to do a little research before committing to a particular company.
Commissions
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Brokerage accounts usually charge a sales commission for each trade -- you'll pay a fee on both the purchase and subsequent sale of a security. You'll want to seek out brokerage accounts that offer low flat fees and other inducements. Exchange-traded funds and closed-end mutual funds are baskets of securities that you buy and sell much like individual securities. A discount brokerage may charge less than $5 for an ETF trade. Some open-ended mutual funds -- funds that dynamically adjust holdings based upon the amount of money invested -- carry a sales load and perhaps a redemption charge. Avoid these if you're fee-adverse.
Your Best Choice
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Unless you're a knowledgeable investor who wants to control trading decisions, your best choice for a low-cost Roth IRA is a no-fee open-end mutual fund. There are several mutual fund companies that carry no fees of any kind for a Roth IRA. Among these, you'll want to select one that offers the kinds of investments with which you're comfortable. If you're risk-adverse, bond and money-market funds may make up the bulk of your portfolio. If you tolerate higher risk levels, stock and commodity funds offer exposure to world markets while providing diversification and professional management.
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References
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