An individual retirement account, or IRA, helps you save for retirement. IRAs are opened through financial institutions. Although IRAs offer tax advantages and can help grow your retirement savings, the process also comes with a few fees that you should be aware of. Some fees are mandatory, but you can avoid others by paying attention when you open and manage your account.
Many financial institutions do not charge a fee for opening an IRA. But some do. If the institution does charge an opening fee, it will be a one-time fee that you never have to pay again. However, if the IRA comes with a load-fund, then you will need to pay the percentage of the load. A load-fund is a percentage of the investment paid to a sales intermediary, such as a broker or financial adviser. For example, if you invest $3,000 into an IRA that charges a 5 percent load fund, you're actually only investing $2,850. If there is no sales intermediary involved with your IRA, then there is no load-fund involved.
Most IRA accounts come with an annual fee. The fee is typically expressed as a flat fee, not a percentage of your IRA investment. The good news is the annual fee is typically waived after the balance of the IRA reaches a certain amount. Some financial institutions do not charge an annual fee for IRA accounts.
If you decide you transfer your IRA to another financial institution, you can expect to pay a closing fee. Closing fees vary from one institution to another. However, the institution you transfer the IRA to may cover the closing fees.
If you trade stocks or exchange-traded funds, also known as ETFs, you'll pay a fee for each trade. Fees vary with each institution. The fees may decrease the more you trade. For example, as of January 2011, Etrade charges $9.99 per stock or ETF trade, but if you make 150 trades per quarter, the price goes down to $7.99 per trade. Scott Trade charges a flat $7 per trade regardless of how many trades you make.
An expense ratio is essentially an IRA management expense that's taken out of your IRA account every year that it's open. An expense ratio is expressed as a percentage and unlike an annual fee, the expense ratio is taken out of your IRA funds. For example, if you had an expense ratio of 1.10 percent and an IRA fund of $20,000, $220 would be taken out of your IRA fund at the end of the year.
As of January 2011, if you take the money out of your IRA account before you reach age 59 ½, you will incur a 10 percent penalty imposed on the total amount. There are exceptions to the rule, though. If you take the money out to pay for education or use $10,000 of IRA funds to pay for your first house, you will not incur any penalty.