3 Ways To Cut Your Roth IRA Expenses

Cutting your Roth IRA expenses is an easy way to put money back in your pocket and shore up your standard of living for your retirement years. Since the IRS limits you to a maximum contribution of $5,000 (if you're under 50) or $6,000 (if you're 50 or over), it's essential to be a good steward of every penny in your Roth IRA. Because once squandered, those funds can't be replaced. Sure, you can always contribute more next year, but you can never go back and contribute extra to make up for bad investments or a personal failure on your part to start maxing out your annual contributions earlier in life.

So if you want to make the most of your Roth IRA, you need to account for every penny and invest wisely. Below are three ways you can cut your Roth IRA investment costs and end up with far more money in your retirement years.

1) Use Commission-Free Dollar Cost Averaging

If you're like most people, you use your Roth IRA to invest in stocks and bonds. In most cases, when you purchase a stock or a bond, you pay a commission. But many brokers now offer programs that allow you to bypass commissions all together. Of course, these programs limit the number of trades you can make per month as well as the universe of funds in which you can invest free-of-charge. But if you dollar cost average into mutual funds or index funds like most investors, these constraints shouldn't be an issue. If this describes you, then you may be able to cut your Roth IRA expenses by shopping around for the best discount broker.

For example, let's say you're currently dollar cost averaging into the stock market by purchasing a set dollar amount of a diversified index fund on the 15th of every month. Your current broker charges you $8 every time you purchase shares of the fund. But if you find a new brokerage program which waives that $8 fee, you can invest the $8 instead. Over the course of 35 years, if that $8 per month earns 10% per year, you'll end up with a grand total of $28,716.17!

What if you buy individual stocks and bonds? You can still save money by shopping around, especially if you're a buy-and-hold investor. Using some of the same aforementioned programs, you can get a certain number of free trades per month and only pay a flat fee for any trades above that number. Or you can pay a flat monthly fee that covers all your trading needs. Plus, most brokers now offer automatic reinvestment of dividends (even if you're purchasing fractions of a share) free-of-charge.

2) Shop For Lower Expense Ratios

If you own mutual funds or index funds in your Roth IRA, one way to cut your expenses and increase your retirement savings is to shop for the lowest expense ratio possible. Whenever you purchase a mutual fund or index fund, you're paying for the marketing, management, and administration of that fund through an annual expense ratio applied to the principal balance of your holdings.

For instance, if you have $100,000 in a mutual fund sporting a 1% annual expense ratio, then you pay $1,000 per year for the privilege of owning that fund. Whether or not this expense is worth it or not depends on the return generated by the fund.

For instance, if your mutual fund returned 16% with a 1% annual expense ratio while an exchange traded fund (ETF) with a 0.1% expense ratio tracking the S&P 500 also returned 16%, then you're paying too much to own that mutual fund. To merit its 1% expense ratio, your mutual fund needs to beat the S&P 500 by at least 0.9% on an annual basis (something you can only measure in hindsight). Otherwise, you're far better off with the lower expense ratio ETF.

How much better off? Let's say you save 1% per year investing in a low expense ratio index fund instead of an actively managed mutual fund. If you invest $5,000 annually for 35 years, that extra 1% per year adds up to $215,384.39. That's a lot of extra change in your pocket because you spent the time to shop around today!

3) Find A No-Fee Roth IRA Broker

Some banks and brokerage houses charge an annual fee for administering your Roth IRA. Make sure yours isn't one of them! There's absolutely no reason to pay an annual fee just to have a Roth IRA. Financial institutions that do so aren't providing any real value to their clients. Any number of brokers out there offer no-fee Roth IRAs, so find one if you haven't already.

Paying a $50 or $100 annual fee is throwing away money that otherwise can work on your behalf. For instance, $50 per year growing at 10% annually from age 25 to 65 adds up to $24,392.59. You can use an extra $24,392.59 in retirement, right?

Why Cut Your Expenses?

With annual IRS imposed contribution limits, you need to watch over every penny in your Roth IRA investment portfolio. Cutting your administrative expenses is a fast and easy way to boost your investment returns regardless of where the markets go in the short-term. And as we've seen, just a full percentage point improvement in your overall annual return can boost your retirement savings by tens of thousands of dollars. Don't leave that money on the table only to regret it later. Start shopping around today for the least expensive Roth IRA options.