Is Your IRA Provider Ripping You Off?
You'll gather assets in your retirement savings accounts for decades, and over that time, even small expenses get magnified by the long time window. A 1% annual expense ratio over 40 years of retirement saving will reduce your final retirement account balances by almost 20%, according to estimates from a Center for Retirement Research brief.
Fees are how the financial industry makes much of its profits, so you can expect to find at least a few of them in even the cheapest IRA. The trick is not to eliminate fees entirely but to find ways to reduce them, without losing features and services that you really want. Below are some of the fees you can expect to see for your retirement accounts.
IRA providers traditionally charged an annual custodial fee, also sometimes called an account service fee, as the price of having an IRA. However, most big brokers now waive this fee if you meet some fairly basic requirements (i.e. if you agree to receive statements and other brokerage documents in electronic form). If you're still paying this fee, find out if your broker will waive it -- and if they won't, consider moving to one who will.
Trading commissions are a charge you'll see on any type of brokerage account, not just an IRA -- but it's still a place you may be able to save some money. Discount and deep discount brokers offer remarkably low commissions on stock purchases, and some will even let you trade the broker's own funds and ETFs at no charge. Pick an IRA trustee whose mutual funds you like, and you could conceivably never pay a single commission.
Many brokers that offer personalized professional advice charge an advisory fee. Advisory fees usually come in the form of a percentage of your account balance, with a fee schedule that charges a smaller percentage the more money you have in your IRA.
Assuming that you don't have millions tucked away in your IRA, you can expect an advisory fee of around 1%. Stay away from advisors charging more unless there's a compelling reason, such as an added service that you value highly. Turning to a robo advisor for investment recommendations can reduce advisory fees by half or more. And naturally, doing all your own investment picking gets rid of this fee entirely.
Investing in mutual funds and ETFs rather than individual stocks and bonds means you'll pay an expense ratio, which is how much the fund managers charge to run the fund or ETF. Sticking with passively managed funds usually gets you a much lower expense ratio, and can save you on other expenses as well. For example, actively managed funds tend to do a lot more trading than passively managed ones, usually resulting in higher capital gains taxes for you.
Finally, many IRA providers charge a transfer fee if you decide to move your investments over to a different provider. Before opening a new IRA, find out if the provider charges such fees -- and if they do, don't open an IRA there unless you're sure you'll want to stay with them indefinitely. Brokerages that have transfer fees generally charge around $50 to $75 to release your investments to your new IRA provider.
If you're not sure how much your IRA provider is charging you, take a look at their fee schedule. Most brokerages post a fee schedule on their websites; if not, you can contact the IRA provider and ask them to send you one. If the fees you're being charged are out of line with the numbers you see here -- or the fees from other brokerages -- it's time to think about moving to a new IRA provider, one who won't charge you an arm and a leg for the privilege.
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