Traditional and Roth IRAs are among the best retirement accounts someone can open to prepare for the future. Thanks to the benefits these accounts offer, you can easily start saving up money for yourself and your family.
Opening a retirement account is a straightforward process, especially if you have a financial advisor on your side. However, traditional and Roth IRAs come with fees you should be aware of.
These fees may affect the amount you get for your retirement savings, so if you were not aware of those, this is the perfect moment to start your research. We’ll cover everything you should know before opening an IRA, including the differences between traditional and Roth IRA fees, assets you can invest in, and more.
Overview of Traditional and Roth IRA
Even though both retirement accounts are similar, there are a few differences to note. Here, you’ll know everything about traditional and Roth IRAs.
Understanding Traditional IRA
A traditional IRA is a retirement account that allows people to contribute pre-tax dollars. In other words, you can make tax-free contributions to your Individual Retirement Account.
You will pay taxes on your current tax rate upon retiring. Also, you will have to deal with annual contribution limits, required minimum distributions, and other rules. Traditional IRAs allow you to take money from your account as long as you’re 59½ years old.
Understanding Roth IRA
Roth IRAs are similar to traditional ones in the sense that you can easily invest money for your retirement. However, Roth IRA contributions are made with after-tax dollars. This means you will pay taxes at the time of contributing. Your withdrawals will be tax-free, though. Still, there are some Roth IRA advantages that people find quite enticing.
You can open a Roth IRA if you meet certain income limits. These limits will vary depending on your Modified Adjusted Gross Income (MAGI). If you’re a single filer, for example, you can’t contribute if you earn more than $153,000 in the 2023 tax year. This amount increases to $161,000 for 2024. Couples filing jointly, on the other hand, will get income limits of $228,000 for 2023 and $240,000 for 2024.
Key Differences Between Traditional and Roth IRA
Here’s an overview of the key differences between Roth and Traditional IRA:
- Traditional IRAs work with pre-tax dollars, whereas Roth IRAs work with after-tax dollars.
- Your contributions grow tax-free with a Roth IRA, but they grow tax-deferred with a traditional one.
- Anyone with earned income can contribute to a traditional IRA. Those with a Roth IRA must have an earned income that’s below a specific limit.
- Traditional IRAs allow you to withdraw as soon as you are 59½ years old. Roth IRAs also require people to have their accounts open for at least five years before making withdrawals.
- You don’t have to take RMDs with a Roth IRA, but you have to take them with a traditional one after you turn 73.
The Concept of IRA Fees
The following sections cover traditional/Roth IRA fees and how they affect a person’s retirement account. Keep reading if you want to save as much money as possible when contributing to your retirement account.
Types of Fees in Traditional and Roth IRA
Usually, you won’t have to pay account setup fees, but you can expect the following regardless of the type of retirement account you go with:
- Transaction Fees: These are the ones you’ll pay each time you make a transaction with someone. These could vary depending on the asset you’re investing in and the platform you’re working with.
- Commissions: You’ll pay these to an investment broker that makes trades on your behalf. Of course, there are ways to do commission-free trading and save money, but we don’t recommend it if you don’t have experience with this process.
- Mutual Fund Expense Ratios/Sales Loads: The expense ratio is the cost of owning a mutual fund or ETF. Some consider it a management fee that you pay to the fund company. On the other hand, sales loads are commissions charged to an investor who buys or redeems shared in a mutual fund.
- Account Maintenance Fees: You’ll pay these fees to the company responsible for managing your account. The fees will vary depending on the company you decide to go for.
As you can see, it can be difficult to know how much you’ll pay for your IRA, as everything depends on what you’re investing in, how you’re investing, and where you’re investing. Getting help from a financial advisor can be great during this process.
Costing of Traditional and Roth IRA
The cost of managing your IRA will depend on who you set it up with, as well as the investments you work with. Regarding the “costing,” you must determine all the costs you must deal with and which ones you could expect in the future.
When you buy/sell stocks, for example, you may have to pay the broker or platform a few fees. On the other hand, if you buy ETFs or mutual funds, you’ll have to pay a “Fund Expense Ratio,” which is deducted from your returns.
Those with a Roth IRA may have to pay penalties if they make withdrawals before they’re 59½ years old or if their account hasn’t reached the five-year mark.
Impact of IRA Fees on Retirement Savings
You should always invest in a group or institution that feels “vanguard.” Mutual funds, for example, require a bit more research before investing. Otherwise, you risk losing your investment money.
When you invest in professional groups, you’re ensuring your experience is safe from the account paperwork stage to future withdrawals.
Deep Dive into Traditional IRA Fees
Fees for Opening a Traditional IRA
Most of the time, you will not have to pay anything to open a traditional IRA. Most institutions don’t charge setup fees, which is great for those looking to save as much money as possible.
However, some companies ask investors to have a “minimum investment amount” to start their accounts, which could be seen as a “setup fee.” We suggest you do research and find the most appropriate company based on your needs.
Maintenance Fees in Traditional IRA
You will certainly pay maintenance fees for your IRA. These depend on which company you’re working with. Some people call them “custodial fees.”
Simply put, these fees will cover any maintenance needs your account may need, ensuring it stays safe. This is crucial if you plan on building a big investment portfolio.
Companies may charge monthly or annual fees, depending on their policies. These fees may range from $25 to $50, although they could be higher if you’re dealing with annual ones.
Investment Fees in Traditional IRA
Investors may also have to pay fees on any transactions they make. Some companies don’t charge you transaction fees as a bonus for working with them, but not all of these groups do it. Check the provider you’re interested in to see which investment fees you may have to pay.
Fees for Closing a Traditional IRA
Technically, you don’t have to pay any fees for closing your account. However, if you decide to make a withdrawal before you’re 59½, you can expect to pay a 10% penalty.
Deep Dive into Roth IRA Fees
Fees for Roth IRAs are similar to the ones for a traditional account. Here’s an overview:
Fees for Opening a Roth IRA
Before you take the first steps to open a Roth IRA, you should understand how it works behind the curtain. Roth IRA providers don’t usually charge a fee for opening and setting up your account. You should still check if the company you’re interested in has a minimum deposit amount, as that could affect how much you pay upon opening it.
Maintenance Fees in Roth IRA
Maintenance fees depend on who you open the account with. Even though some companies charge as little as $5 per month to manage your account, others can ask you for more. Most companies, however, won’t charge you more than $50 per year to keep your account in optimal condition.
Investment Fees in Roth IRA
You’ll have to pay transaction fees on certain investments, although not all companies charge them. Remember, you could pay a bit more money while investing in something like a mutual fund, so make sure you do proper research before making a decision.
Fees for Closing a Roth IRA
Most of the time, you won’t have to pay anything to close your Roth IRA. However, trying to make a withdrawal before reaching 59½ of age or meeting the five-year requirement for the account will result in a 10% penalty for the investor. Sometimes, you may also have to pay income tax on the amount you’re withdrawing.
Strategies to Minimize IRA Fees
Even though not all fees are avoidable, you could minimize what you pay every year by applying a few strategies. Here are the best tips you can use to avoid paying as many fees as possible:
Choosing the Right IRA Provider
The first step to getting lower fees is choosing the right provider. There are dozens (if not hundreds) of investment firms willing to open an IRA for you.
Will any firm open the account you need? Not necessarily. You should always choose a company based on what you need and want. Some offer unique benefits that you won’t find elsewhere, so that’s something interesting to keep in mind.
Another important factor to point out is that not everyone charges the same fees. While some companies may charge you a lot for their services, others won’t ask for a penny, at least when setting up your account.
This doesn’t mean you must invest all your money in the company with the lowest fees. Not paying fees won’t be worth it if the company doesn’t offer the perks you’re looking for.
Choosing the right provider will take some time, especially if this is your first time opening a retirement account. If you’re struggling to find the right option for your needs, you should seek help from a financial advisor.
These people have the experience necessary to give you the safest setup process possible, allowing you to avoid mistakes and other problems.
Investing in Low-Cost Options
Make sure you know what you’re investing in. Some people blindly put their money into assets they think will thrive and then lose money.
Ideally, your IRA should have a mix of different assets, including bonds, stocks, ETFs, etc.
You don’t have to invest in high-cost assets to grow your money. Most of the time, the safest and most effective route is to choose low-cost investments, such as index funds. Actively managed funds, on the other hand, tend to be more expensive.
Finding low-cost options may not be straightforward, though. It could take some time until you find something that aligns with your goals. However, getting help from a professional could make things easier.
As you get more experienced with your retirement account, you could start managing your risk tolerance and invest in higher-cost options. It all depends on how your portfolio evolves as the years pass.
Remember, your goal is to grow your money as effectively as possible. Even though investing in high-cost assets might seem like the shortest route, it’s not always the most effective one. Your money will likely keep growing for years and even decades, so there’s no need to rush anything.
Avoiding Unnecessary Fees
Many investors ignore the fees they pay until it’s too late. This is because most of the time, the fees look insignificant. A 1% of your portfolio in fees might not seem like much, but when you consider that these fees add up as the years pass, you could start to worry.
Investing in less expensive options is already a great option for those looking to save money, but there are other ways to avoid having to pay more than you need to.
Knowing your fund expense ratio, for example, can help you determine how much you can lose from certain investments. Certain funds may seem attractive, but if the risk of investing in them is too high, they’re not worth your time and money.
On the other hand, you must determine if you need a financial advisor. If you’re a seasoned investor, you may not need someone else to help. Many advisors ask for 1% of your portfolio to manage your portfolio every year. When you add up the fund expense ratios, you end up with a huge chunk of your investment returns getting deducted.
Some ask certified financial planners for advice, as they charge flat rates. This can help you organize your expenses better.
When you work with major online brokerages, you can expect lower fees. Some companies don’t even charge anything.
After everything we just mentioned, there’s still something important to address: hidden fees.
Some companies charge hidden fees to maintain your account. Since IRA fees are usually too small to notice, many people don’t pay attention to them until they retire.
You should always stay ahead and look if the company you’re interested in charges any hidden fees. It’s possible to know by looking online or asking other people for advice. Remember, these hidden fees will add up over the years, which can heavily affect your investment money upon retirement.
Simply put, the best way to avoid unnecessary fees is to take your time and not make any hasty decisions. Some companies do their best to make their offer as appealing as possible while hiding the “ugly” fees. Don’t fall for that, and make the right call.
Comparison of IRA Fees Across Providers
We want to make things easier for you, which is why we gathered the best IRA providers on the market and compared their fees. Not only will this give you a better idea of what to expect from them, but it will also help you notice that choosing your provider is likely the most important part of your investment journey.
This company doesn’t charge any setup fees or commissions for online trades of stocks and ETFs. However, you’ll have to pay a $300 setup fee plus $30 every month for a premium robo-advisor.
A robo-advisor is an algorithm-driven service that gives you financial guidance. It may sometimes be more affordable than a human advisor.
There’s no minimum deposit for a self-directed account in Charles Schwab, although you may have to pay $5,000 if you want the robo-advisor. Charles Schwab is perfect for those wanting to minimize costs and the option to invest in a robo-advisor.
Like Charles Schwab, Fidelity doesn’t charge any setup fees or commissions for online trades. If you want a robo-advisor, you may have to pay 0.35% of your portfolio in annual fees.
The main difference between Fidelity and Charles Schwab is that the former doesn’t have a minimum deposit amount, regardless of whether you want the robo-advisor or not. We recommend Fidelity if you want more accessibility to most markets.
E-Trade doesn’t charge any setup fees or commissions. It doesn’t have a minimum deposit either. If you’re an active trader and are looking for access to several markets while saving money, this may be the right way to go.
Vanguard has gained a lot of popularity over the past few years. If you’re someone who prefers passive investment strategies, Vanguard may be right for you. Unfortunately, the company charges a $20 setup fee (unless you enroll online).
Other than that, you don’t have to pay anything for trades of Vanguard ETFs. There’s no account minimum either. If you want a robo-advisor, you must pay a 0.20% annual fee and open the account with a $3,000 minimum.
Merrill Edge offers more options for investors, making it one of the most flexible companies on the list. While there are no setup fees, account minimums, or commissions with this company, you do have to pay fees if you want advisors.
Robo-advisors require a 0.45% annual fee and a $1,000 minimum deposit. Merrill Edge also offers human advisors, which could be more advantageous. It charges 0.85% per year for these advisors, and you must make a $20k minimum deposit.
Ameritrade works similarly to E-Trade in the sense that it works with the basics. It won’t charge you any setup fees or commissions for online trades of ETFs and stocks, and it doesn’t ask for a specific deposit amount either.
Tax Implications of IRA Fees
As you may already know, traditional and Roth IRAs come with a few tax implications. We’ll cover them below so that you get a better idea of what to expect:
Tax Treatment of Traditional IRA Fees
Currently, most fees can’t be deducted from your tax return. These include management fees, advisor fees, and more. Here’s something to keep in mind. You could pay your fees from your account, as these aren’t taxable. This will reduce your account balance, though.
Paying out of your personal funding, however, ensures you don’t touch your IRA money, meaning you could maximize your savings. Remember that traditional IRAs work with pre-tax money. This means you’ll pay taxes upon retiring.
Tax Treatment of Roth IRA Fees
Unlike traditional IRAs, you’ll pay after-tax money for your Roth IRA. These contributions aren’t tax deductible, but you’ll make tax-free withdrawals later.
Still, ongoing fees will affect your investment balance regardless of which retirement account you work with (unless you pay them with your personal funding).
Impact of Fees on Tax Deductions
As you can see, fees of any kind will impact your tax deductions. Unfortunately, fees for investments you pay from your IRA accounts can’t be deducted.
The only “solution” to this problem would be to pay from your non-IRA funds. You would still pay money to cover these expenses, but you’d leave your IRA money intact.
Before the Tax Cuts and Jobs Act of 2017 (TCJA), people could deduct their custodial fees, investment advice fees, and more. That’s not possible anymore, at least for now. We suggest you talk to a financial advisor for more information on how you can minimize your fees through other measures.
Frequently Asked Questions
What Are the Average Fees for a Traditional IRA?
You can expect to pay from $25 to $50 every year to keep your account in optimal condition. Some institutions don’t charge fees, though, so it depends on where you open your account.
What Are the Average Fees for a Roth IRA?
People can expect to pay from $25 to $50 in account maintenance fees. Many Roth IRA providers charge monthly fees instead of annual ones, so you should keep that in mind before investing your time in one of these.
Do All Investments in an IRA Carry the Same Fees?
Not necessarily. While most institutions will charge flat fees for account maintenance, you may have to pay transaction fees, which could vary depending on the asset. When you invest in mutual funds, for example, you’ll have to pay expense and load ratios.
How Do IRA Fees Impact My Retirement Savings?
IRA fees stack up, which is why they could affect your savings. Even a 0.1% difference in what you’re paying can heavily impact how valuable your portfolio is later.
Can I Avoid Paying Fees on My IRA?
You could avoid having to pay higher fees depending on the provider you work with. Some institutions offer lower fees if you have a certain account balance, for example. There are also a few strategies that may allow you to avoid hidden fees and other similar expenses.
Understanding your annual account maintenance fee structure is crucial to maximize your savings. Even though some fees are unavoidable, many strategies (like the ones mentioned here) can help you make the most out of your account.
Whether you’d benefit more from a Roth or traditional IRA depends on your financial goals. If you’re unsure of what to do, make sure to ask a professional. This will take some weight off your shoulders.
Don’t leave your retirement planning for later. Start your saving plans today, and discover how everything is much easier than it looks!