As you ponder over your retirement account choices, the Roth individual retirement account might stand out as an investment opportunity. However, before you take on any account you should understand the fees and other costs that come with it. While it typically doesn’t cost anything to open a Roth IRA account other than the initial investment amount, there are other potential costs to consider. You may want to enlist the help of a financial advisor to help you find the right retirement account for you.
How a Roth IRA Differs From a Traditional IRA
Roth IRAs and Traditional IRAs are both popular retirement savings vehicles in the United States, but they have several key differences, including how they are taxed, contribution rules, and distribution requirements. Here are the major differences between Roth IRAs and Traditional IRAs:
Taxation of contributions:
- Traditional IRA: Contributions to a Traditional IRA are typically tax-deductible, meaning you can reduce your taxable income in the year you make the contribution. This can provide an immediate tax benefit.
- Roth IRA: Roth IRA contributions are made with after-tax dollars, so they are not tax-deductible. There is no immediate tax benefit for contributing to a Roth IRA.
Taxation of withdrawals:
- Traditional IRA: Withdrawals from a Traditional IRA are generally taxed as ordinary income in retirement. This means you will owe income taxes on both your contributions and any investment earnings when you take distributions.
- Roth IRA: Qualified withdrawals from a Roth IRA are tax-free. This includes both your contributions and the earnings on those contributions. This can be a significant tax advantage in retirement.
Required minimum distributions (RMDs):
- Traditional IRA: Traditional IRAs are subject to required minimum distributions (RMDs) starting at age 73 (as of 2023 rules). This means you must withdraw a minimum amount each year, and these withdrawals are subject to income taxes.
- Roth IRA: Roth IRAs do not have RMDs during the original account owner’s lifetime. This can allow for more flexibility in managing your retirement income.
Eligibility and contribution limits:
- Traditional IRA: There are no income limits for contributing to a traditional IRA, but there are annual contribution limits (as of 2023, $6,500 per year for those under 50, with catch-up contributions of $1,000 for those 50 and older).
- Roth IRA: Roth IRAs have income limits that restrict high earners from contributing. These limits can change from year to year. Contribution limits are the same as traditional IRAs.
It’s important to note that rules and regulations related to IRAs may change over time, and individual circumstances can vary.
Does It Cost Money to Open a Roth IRA?
Opening a Roth IRA could carry costs, including account setup fees, annual maintenance fees and custodial fees. Depending on your IRA, buying or selling investments might trigger additional transaction fees. But many Roth IRA providers will not charge a fee for you to open a new account outside of the initial investment amount that is required for you to invest.
Take note: You may have to pay initial fees right away if you plan on investing in specific types of assets. For example, mutual funds or ETFs could involve management fees, whereas individual stocks or bonds might add transaction fees.
Hence, before choosing a financial institution, you might consider asking them for the full list of their fees. It’s also worth your time to research and compare fees across different institutions.
Ongoing Costs of a Roth IRA
Maintaining a Roth IRA also involves ongoing costs, many of which are similar to the investment or administrative fees discussed above. These include annual maintenance fees, investment management fees or possible transaction fees for buying or selling specific types of investments.
Ongoing fees in a Roth IRA can vary depending on the financial institution or brokerage where you hold your account and the specific investment choices you make within the account. Here are some of the common ongoing fees you might encounter in a Roth IRA:
- Account maintenance fees: Some financial institutions charge annual or quarterly account maintenance fees. These fees cover the cost of keeping your account open and providing customer support. Some institutions may waive these fees if you maintain a minimum account balance or meet certain criteria.
- Trade commissions: If you actively trade securities within your Roth IRA, such as buying or selling stocks, bonds or ETFs, you may incur trading commissions with each transaction. Some brokerages offer commission-free trades for certain securities, while others charge a fee.
- Expense ratios: If you invest in mutual funds or ETFs within your Roth IRA, you will be subject to the expense ratio of those funds. The expense ratio is an annual fee that covers the fund’s operating expenses. It is expressed as a percentage of the fund’s assets under management.
- Inactivity fees: Some financial institutions charge inactivity fees if you do not make any transactions or contributions within your Roth IRA over a specified period. These fees are meant to encourage account activity.
- Custodial fees: If you hold alternative assets like real estate, private equity or precious metals in a self-directed Roth IRA, you might have to pay custodial fees to the institution that holds these assets on your behalf.
Bottom Line
Understanding how much you could pay for a Roth IRA, can help guide your retirement plan strategy. While many Roth IRAs will not charge you an opening fee, you may have to look out for ongoing costs and expenses that are tied with specific investments.
Tips for Retirement Planning
- A financial advisor can help you determine how much you need to save for retirement and what investment accounts are best suited to help you get there. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A free retirement calculator is a good tool to help you estimate how much you need to save for retirement.
Photo credit: ©iStock.com/Vladimire Vladimirov, ©iStock.com/Milan_Jovic, ©iStock.com/pixdeluxe