Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

August 22, 2012
How do I find a Roth IRA with a reasonable expense ratio?

Q: I'd like to start a Roth IRA that is invested pretty conservatively, since I have other investments that are more aggressive and growth oriented. I've heard a lot about paying attention to expense ratios and management fees to ensure your money isn't eaten up by high fees. What is an average expense ratio or fee, and do you have any suggestions for finding a Roth to meet my needs? Denise - Elk Grove

A: Using qualified plans are a great way to save for retirement. More importantly, nowadays we are afforded few tax breaks, so utilizing tax efficient vehicles is a great decision. The Roth IRA is a special type of retirement plan under US law that is generally not taxed, provided certain conditions are met. The Roth IRA's principal difference from most other tax advantaged retirement plans is that, rather than granting a tax break for money placed into the plan, the tax break is granted on the money withdrawn from the plan during retirement. With this description, think of a Roth IRA as more of an investment account than an actual investment.

An expense ratio is a measure of what it costs an investment company to operate a mutual fund. Most often, the expense ratio is determined through an annual calculation, where a fund's operating expenses are divided by the average dollar value of its assets under management (AUM.) Essentially these expenses can be explained as operating expenses represented as a percentage of AUM.

Being aware of the cost of any product you purchase is a smart decision. Investing is no different than purchasing a good filet from your grocer. You wouldn't go to the best grocer in town and assume that if they have high quality meat their prices are fair. Similarly, as a product, not all mutual funds are structured equally. For instance, actively managed mutual funds require higher transaction costs, a larger staff and increased accounting expenses. Mutual funds that focus on the emerging markets require offices overseas which carry expenses such as translation costs, foreign regulatory expenses and the likes.

Think of an expense ratio as a measuring tool when comparing similar apples to each other. When comparing two mutual funds with different performance expectations; an investor would recognize more aggressive funds typically have higher expense ratios.


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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at cbuck@sacbee.com

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.



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