Your Guide to Understanding IRA Fees

By Clifton Linton
Senior Writer, mPower

In This Story Common IRA Fees Fees by IRA Provider

Fifty dollars to open your IRA! Fifty dollars to close your IRA! Fifty dollars to maintain your IRA! Arrgghh!!

It may seem like it's only a matter of time before you'll be dinged with a $50 fee just to get your quarterly statement.

Yet, if you are willing to shop around a bit, you can find ways to reduce the fees that are charged to your IRA. Here's our guide to those pesky IRA fees.

minute: read this article at a glance.

It can be more than a little disheartening when you realize you have to pay to invest your retirement money. You'd think the folks privileged enough to get your money would be happy with that alone. After all, you may be letting them use it for 20 years or more.

Regardless, IRA fees are a fact of investing life.

How much you pay often depends upon where you choose to invest and the size of your account.

If you're just starting out, the array of investment options and fees can be dizzying. But, your needs are likely to be simpler than those of an investor with a six-figure retirement account balance. For those with low balances or wanting easy account maintenance, opening an IRA at a bank or mutual fund company may be the way to go, financial planners we interviewed said.

"I think account value helps determine the proper IRA (location) for a person." — Don Boegel, certified financial planner.

As your account balance builds, you need to rethink your strategy, planners say. If you have $100,000 in your IRA, it probably doesn't make sense to keep it in an inexpensive bank IRA just so you only have to pay a $7.50 annual maintenance fee. With a balance that size, you likely need a broader investment selection than banks generally provide, such as would be available at a brokerage firm.

"I think account value helps determine the proper IRA (location) for a person," said Don Boegel, a Minneapolis-based certified financial planner.

What this all means is that regardless of your situation, either you need to do the homework to figure out how much your fees may run, or you might want to consider hiring a financial planner to help you sort things out.

Still, the most important method of measuring your IRA's performance is the rate of return, Boegel adds. It may be worth a couple of extra bucks a year in fees if your IRA's rate of return is superior.

Common IRA Fees

One of the most common places to find out what fees you are being charged, and why, is in the tiny print that accompanies the account agreement you sign.

Establishment or set-up fee: This pays for the initial set-up of your account including a custodial arrangement. Typically, mutual funds, brokerage firms and independent trust companies charge these one-time fees, which can range from $10 to several hundred dollars.

Fee Comparison Here's IRA Junction's easy-to-read IRA fee guide.

Custodial fee: You pay this fee every year to maintain the custodial account. Everyone — banks, mutual fund companies, brokerage firms and independent trust companies — charges this fee. Banks are generally the cheapest, charging $7.50 a year. Mutual fund company fees often run between $10 and $20 a year. Brokerage firm fees generally run from $35 to $50 a year, and independent trust companies may charge between $50 and $100 a year, depending on the assets in the account, Boegel says.

Termination fee: You pay this fee when you close your account and/or transfer it to another firm, says Certified Financial Planner Terry Balding, of Terry Balding & Associates in Sun Prairie, Wis. "Everybody charges a termination fee," he said.

Typically, it will run you $50 at a mutual fund or brokerage company to several hundred dollars at an independent trust. Banks are one of the few financial institutions that often don't charge a termination fee. But commonly, if you open an IRA at a bank, your investment choices may be limited.

Commission or transaction fee: This fee, most commonly charged by brokerage firms and independent trustees, is charged every time you buy or sell a security. It is the sales commission charged by these firms. With an online broker, you may pay only $8 a trade. A full-service, Wall Street broker may charge $50 to $100 a trade.

The good news about commission fees is that they are falling, says Philip Cook, a certified financial planner in Torrance, Calif. The bad news is that brokerage firms are boosting other fees, such as annual account maintenance charges. If you set up an IRA at a brokerage firm or independent trustee, ask what the commission fees are and what extra maintenance charges are being assessed. Some of these are spelled out in the fine print of your account agreement.

Load: Brokerage firms charge commissions, mutual fund companies charge loads. Why the difference in nomenclature? We don't know.

There are front-end loads, meaning you pay a commission at the time you buy the fund, but not when you sell it. There are back-end loads, meaning you pay the commission when you sell the fund, not when you buy it. There are no-load funds, meaning there's no commission. In general, all things being equal, it's a good idea to look for no-load funds. Why pay a fee when you don't have to?

Load fees may be fixed, or charged as a percentage of assets. Check with your mutual fund company.

Mutual fund management fee: In addition to loads and annual custodial fees, mutual funds charge a management fee. This fee is typically charged as a percentage of the assets you have invested in the fund. Some may be as little as half a percent; others as large as 2 percent. The fees pay the salary of the mutual fund manager and his staff, and the fund's transaction costs and overhead. Even index funds charge management fees, though their fees tend to be lower than for actively managed funds.

Surrender charge: Remember the warning, "substantial penalty for early withdrawal"? Welcome to the world of surrender charges. Surrender charges are typically charged by insurance companies on variable annuities, by banks on certificates of deposit (CDs) and sometimes by mutual fund companies. They're a way to force you to keep your money with the insurance company, bank or mutual fund company for a set period of time.

With a variable annuity, the surrender charge pays the sales agent's commission. It also compensates the insurance company in the event that it doesn't get to keep your money for the agreed length of time. With a bank, if you take your money out of a CD early, you are breaking a contract and the surrender charge is your penalty. With a mutual fund, the surrender charge may also pay the selling agent's commission. This charge may be separate from the back-end load fees discussed earlier, mostly because the surrender charge expires over time, whereas the back-end load will always be charged.

Typically, surrender charges are assessed as a percentage of assets. "They can be dandies," Balding says. He said he's seen cases where in the first year, the surrender charge for an annuity was 30 percent of assets.

With bank CDs, surrender charges often are lower than for mutual funds or annuities.

The longer you keep your money in an investment, the smaller the surrender charge. In some cases, it may take seven or eight years for a surrender charge to expire. You need to explicitly ask if you may be charged a surrender fee.

Special asset management fee: Want to hold gold or a real estate trust deed in your IRA? You can, but it'll cost you. The IRS law defining IRAs requires that any assets held in the account must be valued every year. This is no problem with assets such as CDs, bonds, mutual funds or stocks. Those assets are valued every day on the open market.

With items such as gold bars or a real estate trust deed, however, you need to find a person or firm willing to hold these assets in your custodial account and willing to assess their value every year.

Special asset fees may be fixed or charged as a percentage of assets. Special assets are typically better suited for high-net worth individuals, financial planners say.

Variable annuity internal contract charge: Insurance companies charge this annual fee to holders of variable annuities. It pays for the management of the annuity as well as to cover some actuarial costs. It's the insurance company's way of hedging its bets in the event that you live longer than expected. Typically, the fee is about 1.25 percent to 1.5 percent of assets.

Roth IRA conversion fee: Independent trustees and brokerage firms typically charge a one-time fee of between $25 to $50 to convert a traditional IRA to a Roth, or reconvert a Roth to a traditional IRA.

Wrap or advisory fee: If you decide to have your financial planner help you buy or sell your IRA investments, he or she may charge what is known as a "wrap fee." This fee is like a commission and it compensates your planner for his or her expertise in helping design an optimal portfolio for you. The wrap fee is typically negotiated between the client and the planner, Boegel says.

Don't confuse this with a wrap fee that is sometimes charged to 401(k) plan participants who have their investments provided by an insurance company. The fees are different.

Fees by IRA Provider

Generally speaking, banks have the lowest fees, says Cook. On the downside, banks often have a limited selection of investment choices, money market mutual fund accounts and CDs. Many of these investments offer lower returns than can be found elsewhere.

"If you go to a bank, they give away the cost to administer the account because you put your money in their CD at 5 percent interest and they loan it back out at 8 percent interest. The spread is where they make their money," Cook said.

Mutual fund companies generally charge the next lowest set of fees. With a mutual fund company, you may have a greater choice of investments, but you're often also locked into investing exclusively in their funds. That can be a problem if you happen to choose a poorly performing fund family.

Mutual fund company set-up fees can be as cheap as $10. Their annual custodial fees can run between $10 and $20, and often there's no termination fee, Cook said.

Mutual fund companies and banks are good places for folks with low balances to get started saving, certified financial planners advise.

Regardless of your situation, either you need to do the homework to figure out how much your fees may run, or you might want to consider hiring a financial planner to help you sort things out.

Brokerage firms are next up on the cost scale. The advantage of opening an IRA here is that you have a greater selection of investments.

For people with IRA account balances of $50,000 or more, Cook recommends a brokerage. While some folks may balk at the higher fees, he says those fees may be offset by greater service and investment selection.

The most expensive place to stash your money is with an independent trustee. For those higher fees, you get more service and the ability to invest in more exotic investments. With independent trustees, fees are often charged as a percentage of assets. For larger accounts, that percentage often declines, Boegel said.

Standard custodial fees can run from $50 to $100 a year at trust firms. Nontraditional asset fees can start at $50 a year. Termination fees can be several hundred dollars a year, Cook says.

Fees are a secondary, but significant, method of portfolio measurement. While a 1 percent fee seems to be a small price to pay to maintain your account, over time that charge can significantly impact your final account balance.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Your Guide to Understanding IRA Fees

By Clifton Linton
Senior Writer, mPower

In This Story Common IRA Fees Fees by IRA Provider

Fifty dollars to open your IRA! Fifty dollars to close your IRA! Fifty dollars to maintain your IRA! Arrgghh!!

It may seem like it's only a matter of time before you'll be dinged with a $50 fee just to get your quarterly statement.

Yet, if you are willing to shop around a bit, you can find ways to reduce the fees that are charged to your IRA. Here's our guide to those pesky IRA fees.

minute: read this article at a glance.

It can be more than a little disheartening when you realize you have to pay to invest your retirement money. You'd think the folks privileged enough to get your money would be happy with that alone. After all, you may be letting them use it for 20 years or more.

Regardless, IRA fees are a fact of investing life.

How much you pay often depends upon where you choose to invest and the size of your account.

If you're just starting out, the array of investment options and fees can be dizzying. But, your needs are likely to be simpler than those of an investor with a six-figure retirement account balance. For those with low balances or wanting easy account maintenance, opening an IRA at a bank or mutual fund company may be the way to go, financial planners we interviewed said.

"I think account value helps determine the proper IRA (location) for a person." — Don Boegel, certified financial planner.

As your account balance builds, you need to rethink your strategy, planners say. If you have $100,000 in your IRA, it probably doesn't make sense to keep it in an inexpensive bank IRA just so you only have to pay a $7.50 annual maintenance fee. With a balance that size, you likely need a broader investment selection than banks generally provide, such as would be available at a brokerage firm.

"I think account value helps determine the proper IRA (location) for a person," said Don Boegel, a Minneapolis-based certified financial planner.

What this all means is that regardless of your situation, either you need to do the homework to figure out how much your fees may run, or you might want to consider hiring a financial planner to help you sort things out.

Still, the most important method of measuring your IRA's performance is the rate of return, Boegel adds. It may be worth a couple of extra bucks a year in fees if your IRA's rate of return is superior.

Common IRA Fees

One of the most common places to find out what fees you are being charged, and why, is in the tiny print that accompanies the account agreement you sign.

Establishment or set-up fee: This pays for the initial set-up of your account including a custodial arrangement. Typically, mutual funds, brokerage firms and independent trust companies charge these one-time fees, which can range from $10 to several hundred dollars.

Fee Comparison Here's IRA Junction's easy-to-read IRA fee guide.

Custodial fee: You pay this fee every year to maintain the custodial account. Everyone — banks, mutual fund companies, brokerage firms and independent trust companies — charges this fee. Banks are generally the cheapest, charging $7.50 a year. Mutual fund company fees often run between $10 and $20 a year. Brokerage firm fees generally run from $35 to $50 a year, and independent trust companies may charge between $50 and $100 a year, depending on the assets in the account, Boegel says.

Termination fee: You pay this fee when you close your account and/or transfer it to another firm, says Certified Financial Planner Terry Balding, of Terry Balding & Associates in Sun Prairie, Wis. "Everybody charges a termination fee," he said.

Typically, it will run you $50 at a mutual fund or brokerage company to several hundred dollars at an independent trust. Banks are one of the few financial institutions that often don't charge a termination fee. But commonly, if you open an IRA at a bank, your investment choices may be limited.

Commission or transaction fee: This fee, most commonly charged by brokerage firms and independent trustees, is charged every time you buy or sell a security. It is the sales commission charged by these firms. With an online broker, you may pay only $8 a trade. A full-service, Wall Street broker may charge $50 to $100 a trade.

The good news about commission fees is that they are falling, says Philip Cook, a certified financial planner in Torrance, Calif. The bad news is that brokerage firms are boosting other fees, such as annual account maintenance charges. If you set up an IRA at a brokerage firm or independent trustee, ask what the commission fees are and what extra maintenance charges are being assessed. Some of these are spelled out in the fine print of your account agreement.

Load: Brokerage firms charge commissions, mutual fund companies charge loads. Why the difference in nomenclature? We don't know.

There are front-end loads, meaning you pay a commission at the time you buy the fund, but not when you sell it. There are back-end loads, meaning you pay the commission when you sell the fund, not when you buy it. There are no-load funds, meaning there's no commission. In general, all things being equal, it's a good idea to look for no-load funds. Why pay a fee when you don't have to?

Load fees may be fixed, or charged as a percentage of assets. Check with your mutual fund company.

Mutual fund management fee: In addition to loads and annual custodial fees, mutual funds charge a management fee. This fee is typically charged as a percentage of the assets you have invested in the fund. Some may be as little as half a percent; others as large as 2 percent. The fees pay the salary of the mutual fund manager and his staff, and the fund's transaction costs and overhead. Even index funds charge management fees, though their fees tend to be lower than for actively managed funds.

Surrender charge: Remember the warning, "substantial penalty for early withdrawal"? Welcome to the world of surrender charges. Surrender charges are typically charged by insurance companies on variable annuities, by banks on certificates of deposit (CDs) and sometimes by mutual fund companies. They're a way to force you to keep your money with the insurance company, bank or mutual fund company for a set period of time.

With a variable annuity, the surrender charge pays the sales agent's commission. It also compensates the insurance company in the event that it doesn't get to keep your money for the agreed length of time. With a bank, if you take your money out of a CD early, you are breaking a contract and the surrender charge is your penalty. With a mutual fund, the surrender charge may also pay the selling agent's commission. This charge may be separate from the back-end load fees discussed earlier, mostly because the surrender charge expires over time, whereas the back-end load will always be charged.

Typically, surrender charges are assessed as a percentage of assets. "They can be dandies," Balding says. He said he's seen cases where in the first year, the surrender charge for an annuity was 30 percent of assets.

With bank CDs, surrender charges often are lower than for mutual funds or annuities.

The longer you keep your money in an investment, the smaller the surrender charge. In some cases, it may take seven or eight years for a surrender charge to expire. You need to explicitly ask if you may be charged a surrender fee.

Special asset management fee: Want to hold gold or a real estate trust deed in your IRA? You can, but it'll cost you. The IRS law defining IRAs requires that any assets held in the account must be valued every year. This is no problem with assets such as CDs, bonds, mutual funds or stocks. Those assets are valued every day on the open market.

With items such as gold bars or a real estate trust deed, however, you need to find a person or firm willing to hold these assets in your custodial account and willing to assess their value every year.

Special asset fees may be fixed or charged as a percentage of assets. Special assets are typically better suited for high-net worth individuals, financial planners say.

Variable annuity internal contract charge: Insurance companies charge this annual fee to holders of variable annuities. It pays for the management of the annuity as well as to cover some actuarial costs. It's the insurance company's way of hedging its bets in the event that you live longer than expected. Typically, the fee is about 1.25 percent to 1.5 percent of assets.

Roth IRA conversion fee: Independent trustees and brokerage firms typically charge a one-time fee of between $25 to $50 to convert a traditional IRA to a Roth, or reconvert a Roth to a traditional IRA.

Wrap or advisory fee: If you decide to have your financial planner help you buy or sell your IRA investments, he or she may charge what is known as a "wrap fee." This fee is like a commission and it compensates your planner for his or her expertise in helping design an optimal portfolio for you. The wrap fee is typically negotiated between the client and the planner, Boegel says.

Don't confuse this with a wrap fee that is sometimes charged to 401(k) plan participants who have their investments provided by an insurance company. The fees are different.

Fees by IRA Provider

Generally speaking, banks have the lowest fees, says Cook. On the downside, banks often have a limited selection of investment choices, money market mutual fund accounts and CDs. Many of these investments offer lower returns than can be found elsewhere.

"If you go to a bank, they give away the cost to administer the account because you put your money in their CD at 5 percent interest and they loan it back out at 8 percent interest. The spread is where they make their money," Cook said.

Mutual fund companies generally charge the next lowest set of fees. With a mutual fund company, you may have a greater choice of investments, but you're often also locked into investing exclusively in their funds. That can be a problem if you happen to choose a poorly performing fund family.

Mutual fund company set-up fees can be as cheap as $10. Their annual custodial fees can run between $10 and $20, and often there's no termination fee, Cook said.

Mutual fund companies and banks are good places for folks with low balances to get started saving, certified financial planners advise.

Regardless of your situation, either you need to do the homework to figure out how much your fees may run, or you might want to consider hiring a financial planner to help you sort things out.

Brokerage firms are next up on the cost scale. The advantage of opening an IRA here is that you have a greater selection of investments.

For people with IRA account balances of $50,000 or more, Cook recommends a brokerage. While some folks may balk at the higher fees, he says those fees may be offset by greater service and investment selection.

The most expensive place to stash your money is with an independent trustee. For those higher fees, you get more service and the ability to invest in more exotic investments. With independent trustees, fees are often charged as a percentage of assets. For larger accounts, that percentage often declines, Boegel said.

Standard custodial fees can run from $50 to $100 a year at trust firms. Nontraditional asset fees can start at $50 a year. Termination fees can be several hundred dollars a year, Cook says.

Fees are a secondary, but significant, method of portfolio measurement. While a 1 percent fee seems to be a small price to pay to maintain your account, over time that charge can significantly impact your final account balance.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.