Studies reveal that Americans spend too much on fees associated with their 401(k)s and IRAs, according to one research report. Though seemingly minor at first, the fees eventually add up over time.
Some IRA providers charge annual custodial fees; however, free accounts can still be found. So how should IRA fees be set?
Account Setup Fees
Fees play an integral part of retirement accounts such as IRAs. Even small variations can have a major effect on your account balance over time.
As soon as opening an account, one of the first fees you should consider are account setup fees. These one-off fees typically charged when opening an account with certain providers may also charge periodic maintenance fees which can usually be avoided by maintaining a minimum balance and using in-network ATMs.
Custodial fees (sometimes known as IRA maintenance fees ) should also be monitored carefully, as they are charges levied by firms authorized to offer IRAs and are relatively rare; most brokerages and robo-advisors don’t impose such charges, though some do.
Account Maintenance Fees
Fees associated with an IRA account can significantly diminish its value. Some fees such as ATM and overdraft charges may only have minor effects; others, like account maintenance fees, could have far-reaching ramifications on retirement savings.
There are ways to sidestep bank fees: some don’t charge them at all while others may allow customers to have them waived by creating direct deposit or meeting minimum balance requirements.
When it comes to investing fees, there are also ways to minimize them; one option is using external dollars rather than funds from an IRA account to pay investment management fees – this usually provides better tax savings than paying fees directly out of an IRA due to associated taxes and penalties like early withdrawal fees and tax distributions.
Fees associated with an IRA account can have a dramatic impact on its total value, so investors should search for plans offering lower investment fees as possible.
These fees may be charged as a percentage of assets held or transaction-based; examples include stock or ETF trading commissions and mutual fund expenses and sales loads.
Tax treatment of fees paid from retirement accounts is more complex. In general, they’re deductible in the year paid as Section 212 expenses subject to the 2%-of-AGI floor for miscellaneous itemized deductions; however, there may be exceptions.
Wrap fees provide all-inclusive resort experiences in financial advisory. Your advisor pays one flat fee that covers investment management fees and brokerage costs, making this strategy ideal for investors with high trading volumes, while potentially eliminating advisor incentives to make excessive trades for commission purposes.
Investors should carefully assess whether their wrap fee provides everything that they require. Investment firms are required to provide a brochure outlining what services and costs the fee will cover, while paying through a taxable account rather than retirement accounts can avoid certain costly tax consequences including distributions and prohibited transaction penalties.
Early Withdrawal Penalties
As a rule, withdrawals made before age 59 1/2 are subject to tax and may incur a 10% penalty; unless exempt. *
Exceptions apply for withdrawals used to pay qualified medical expenses; withdrawals up to $10,000 qualify and can be taken tax-free.
Common exceptions include purchasing a first home (withdrawals must be spread over two years) and withdrawing funds to cover real estate costs related to home improvement projects. There is also an exception for military reservists called to active duty for at least 180 days or an indefinite period, providing they withdraw them as planned from their retirement savings plan.
If you intend to withdraw a substantial early sum from an IRA, seek advice from your tax advisor in order to qualify for an exception and understand any possible negative ramifications associated with such action.