If you read the prospectus associated with investments like mutual funds or annuities that you are considering for your IRA account, you will see considerable information designed to disclose what you can expect to pay in fees over a period of years on your investment. Securities regulations require these disclosures.
Would you buy a car or house without asking how much it costs and surveying the anticipated costs for insurance, gas, and maintenance?
Here is an example of how fees can add up...we'll look at typical investment options and costs over time.
Option 1 - broker sold mutual funds held in a "direct account". Fund family examples would include American Funds, Franklin Templeton, Putnam etc. These funds involve a front end load or sales charge if you buy class A shares.
Option 2 - managed account at a broker with an annual fee in addition to the fees charged by the funds held within the account. No front end charge but an annual charge usually assessed quarterly for the life of the account. The annual fee is often 1% of account assets plus the fund expenses.
Option 3 - No load mutual funds with no sales charge or separate management fee. (Just the usually low fund expenses depending on the funds you select.) The mutual fund company has non-commissioned reps who will help you open the account and select appropriate funds and review your account periodically. Examples of fund families would include Vanguard, Fidelity, T Rowe Price, and SiT group.
Option 4 - Variable annuity with multiple layers of expenses and charges and a well dressed agent usually driving a BMW or Lexus.
Here are hypothetical estimates of how much you will pay in TOTAL fees over 10 or 25 years on each of the different types of accounts: The actual totals will vary - bring in your specific information and we can do the accounting for you to tabulate a more accurate number based on the funds you are considering or already invested in. A $250,000 account is used to compute these estimates and doesn't take into consideration the fluctuation in account values.
TOTAL FEES OVER 10 or 25 YEARS
Option 1: $33,750 (10 Years) $73,125 (25 Years)
Option 2: $45,000 (10 Years) $112,500 (25 Years)
Option 3: $ 3,800 (10 Years) $ 9,500 (25 Years)
Option 4: $ 51,250 (10 Years) $128,125 (25 Years)
1) For purposes of comparing fees, we assume the account balance is unchanged for a 10 (or 25) year period.
2) Todd's Tax Service LLC provides this information to assist clients in making informed choices when they buy investments and rollover their retirement funds.
3) Todd's Tax Service LLC does not provide investment advice. Please do not ask me which funds to invest in beyond identifying low cost funds.
4) Todd's Tax Service LLC is using a hypothetical investment allocation. Discuss your risk tolerance and investment objectives with the firm of your choice.
5) It's important to note that investing in low cost funds doesn't reduce investment risk. A major stock market correction will apply across the board to all equity funds, as an example.
6) Equally true, however, is that paying big fees doesn't guarantee or increase the likelihood of higher overall returns.
7) There is extensive information on my website under "Financial Info" and "Tax Info" regarding your tax and financial situation. Please ask for clarification on any areas that are unclear.
8) If you are overwhelmed and not sure what to do with regard to your rollover or investments, consider the low cost option (Fidelity or Vanguard) knowing you can switch to something else without any penalties. (Once you buy investments with a front end load or surrender charge, you can't change your mind and undo that expensive decision without having already paid a front end load or surrender charge.)
How do fees total up over the years on your IRA (or investment) account?
Investment fees aren't going to apply to the portion of your retirement you deposit into your bank IRA. If you have a brokerage IRA, you can buy CDs and individual securities like government bonds and individual stocks inside the account. Assuming your broker isn't charging the annual fee on these assets, this is a great way to trim investment expenses and potentially boost overall performance. Holding individual securities as part of a balanced portfolio is one of the best kept secrets with regard to your retirement account.
Todd's Tax Service LLC