The Roth IRA is a flexible retirement arrangement when compared to the rules governing the traditional ira, but one can still incur substantial roth ira fees in management services, or penalties when transferring, withdrawing from, or contributing money to their account. To prevent unnecessary fees and penalties, consult with a professional before withdrawing, rolling over, or transferring money to and from the account.
Account Servicing Fees
These fees are increasingly rare, as most large financial institutions offer no-fee account management services. Even paper statement fees are generally waived with retirement accounts of all types. The exception is when a Roth self-directed ira is involved. Anytime the individual is trading stocks and financial instruments, institutional service fees are incurred.
Service fees include the following, and are separate from any penalties incurred by the IRS:
-Early withdrawal fees, eligible or not
-Removal fee for excess contributions
-‘Re-characterizations.’ This is a change in the amount contributed, and there is a fee.
-Conversion fees which apply when a person converts from a Roth to a traditional or vice versa.
There are also charges for:
-Express mail service fees
-Account transfers
-Checks and checkbooks
-Duplicate account statements
This is a partial list of possible fees by full service and discount brokerage firms. They can vary from $10 to $60 each, or more, and this list does not include the charges for general trading commissions, stock certificates and other related activity.
IRS Penalties
Aside from pulling the money out early and not giving it the opportunity to grow, the IRS penalties are the largest roth ira fees. Specifically, a 10% penalty will be levied for any early withdrawal which falls outside of the eligibility requirements. It applies to Roth accounts when the distribution on earnings is taken before the age of 59 ½ and the passing of five tax years, or when the principle is accessed before the same seasoning period is up.
To be clear, earnings on principle can not be removed without penalty before five tax years have passed and the owner has turned 59 ½; the principle can be taken anytime after this five years. The fees for an excess contribution can add up as well. For every year excess money sits in the account, a penalty of 6% is levied, until it is removed.
The IRS will tax converted funds under certain circumstances as well. For a Roth 401 (k) which is converted into a Roth ira, there is no taxable event. However, funds rolled over from a traditional ira or 401 (k) are taxed as regular income in the year of the conversion. Just be sure the conversion is done by the deadline, and does not result in an excess contribution, or a 10% penalty for early withdrawal.
To prevent unnecessary penalties and fees, the best approach is not to touch the money if possible. To get the maximum amount of growth from compounded interest, and avoid IRS penalties, follow distribution rules to the letter. If an excess contribution is made, take action to correct it and minimize its effects, and take care to avoid any unnecessary or ineligible withdrawals.
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