The government encourages you to open an individual retirement account by awarding you benefits such as tax-deductible contributions and tax-deferred growth. The encouragement seems to be working, because at the end of 2012, Americans had invested $5.4 trillion in IRAs. The fees on these accounts pay the salaries of many people in the financial industry and reduce your returns. However, you can keep fees in check if you know what to look for.
Opening an Account
The first fees you’ll face are the ones an IRA custodian charges simply for opening an account. An IRA custodian can be a bank, mutual fund, brokerage or other institution approved by the Internal Revenue Service. Many discount brokers and large mutual funds don’t charge an account-opening fee. However, if you use a full-service broker or high-fee mutual fund company, you might have to pay an application fee. You also might expect account-opening fees if you invest in non-standard investments such as real estate or precious metals. Custodians must disclose all fees, including the ones they charge to open an account.
Comparing Mutual Fund Loads
Many IRA owners invest in mutual funds. To compare the fees of different mutual funds, it’s helpful to separate the fees for the purchase and sale of fund shares from the fees you pay for owning the shares. Purchase and sale fees come in a variety of forms. A “sales load” is money shelled out to a broker that hawks a particular fund. The Financial Industry Regulatory Authority caps these at 8.5 percent. You might fork over a “front-end” sales load when you buy mutual fund shares and a “back-end” load when you sell them. Mutual fund companies may collect these fees even if they don’t use outside brokers. The fund prospectus and website reveal these fees. Mutual fund comparison sites such as Morningstar offer free fund screeners that allow you to select no-load funds or funds with low expense ratios.
Comparing Expense Ratios
A fund’s expense ratio is the price you pay for owning shares. It covers many costs including those for portfolio management, accounting, reporting and marketing. “Management fees” pay a fund’s investment adviser for selecting which stocks or bonds to own. All funds charge management fees, and these fees might exceed 1 percent of your investments under management. You also might have to pay “12b-1” fees for the fund’s marketing, selling, advertising and printing expenses. “Other fees” include the cost of lawyers, custodians, accountants, transfer agents and administrators. Fund companies must disclose all of these fees using a standard-format table under the title “Shareholder Fees” in the fund prospectus. Most fund websites reveal the same information. Use this table to compare the fees charged by the mutual funds you are considering for your IRA.
You might open your IRA at a brokerage firm, especially if you want to invest in the funds of multiple companies or plan to invest directly in stocks, bonds and other instruments. Brokers must disclose the commissions they charge for their services, such as buying and selling shares, futures, options and currencies. Beware that brokers may tack on additional fees for servicing and maintaining your account. Brokers also collect sales loads from mutual fund companies when they sell you the fund’s shares. To compare fees, insist on getting a copy of the broker’s disclosure documents before opening an account.
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