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A Roth and a fee

Chris Farrell Sep 20, 2011

Question: I am a full time student and have a small Roth IRA. I had no plans to withdraw any money before retirement until I received a notification from the company that manages the IRA saying that there is a yearly $12 fee for IRAs with balances under $2,000 which the company can cover by selling shares. I contributed $1,000 before becoming a student but I do not have an extra grand to bring the balance above the floor for the extra fee.

Another wrinkle to this story is that I will be completing a full time internship starting January 2012, so I will have no higher education expenses for the spring semester as I will only return to full-time study in the summer. I feel like there is no way to withdraw funds from the IRA without penalty since I won’t have qualifying higher education expenses until the spring (the fee will be charged in November).Is there any way that I could withdraw what I have in the IRA without facing the 10% penalty? Phil, Louisville, KY

Answer: You have two basic choices. First, you could transfer the account to a financial institution that won’t charge you an fee to maintain your Roth account. A number don’t. For instance, I checked with Charles Schwab and it has a $1,000 minimum for a Roth but no annual account maintenance fee. The Vanguard minimum is typically $3,000, but it does offer a few investment choices for a Roth with a $1,000 minimum. There’s no annual account maintenance fee if all statements and correspondence is electronic.

The transfer should be financial institution to financial institution so that the tax sheltered aspect of the Roth is preserved. I recently transfered a small IRA because the bank I had it with wanted to impose a similar fee. I had been meaning to do it, but the prospect of paying a higher fee than the account had earned over the past year sure gave me an incentive to act.

Second, you could close the account with no-to-little penalty and no-to-minimal tax liability. Here’s why: You can withdraw the amount you contributed to the IRA without paying a penalty fee or taxes on the withdrawal. You say you contributed $1,000 and it’s worth about the same. You would only have to pay the 10% penalty and your ordinary income tax on any gain when you take the money out–and that’s only if you have a gain.

You don’t need to wait for the exclusion on penalty fees for qualified education expenses with your Roth. You could then put the withdrawn money toward your education.

That said, I would prefer that you transfer the Roth rather than liquidate it.

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