Please ensure Javascript is enabled for purposes of website accessibility

What Is an Exit Fee?

By Motley Fool Staff – Jul 17, 2016 at 9:42PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Learn the costs you may have to pay when you want your investment money back.

Mutual funds aren't the only investment that charges exit fees, but fund investors have to be especially careful. Image source: Getty Images.

The investing world is full of little-known charges and fees that can add up and have a huge adverse impact on your investment returns. Exit fees are charges that a fund or investment company imposes on investors when they sell shares or withdraw money from their investment. These fees come with different names depending on the context; annuity withdrawals are sometimes referred to as "surrender charges," while mutual funds can impose "back-end loads," "redemption fees," or "deferred sales charges." Whatever it's called, an exit fee reduces your profit on an investment position, and because it doesn't get imposed until the end, you might naturally ignore its impact on your returns until it's too late.

The different forms of exit fees

Exit fees have several things in common, the most important being that the charges come when you're trying to exit your investment. Another common thread is that most exit fees are expressed as a percentage of the money you take out of the investment.

There are many common exit fees. They include:

  • Early-withdrawal fees from bank certificates of deposit. These usually entail forfeiting the interest earned over a specified period, such as six months or a year.
  • Deferred sales charges on mutual funds. Also known as back-end loads, these charges are expressed as a percentage of the value of the shares you sell. The longer you've held your shares, the lower the deferred sales charge typically is. Back-end loads of 1% to 6% or more are typical.
  • Redemption fees on mutual funds. In contrast to back-end loads, the proceeds from these fees typically go back into the fund to compensate ongoing shareholders for the expenses the fund incurs to handle your transaction. Fees are usually in the range of 0.5% to 2%.
  • Surrender charges on insurance products. Annuities and life insurance policies often impose a percentage charge on the cash value of an insurance policy or on the withdrawn amount of an annuity. As with back-end loads, the amount of the surrender charge usually falls over the time as you hold the investment, but surrender periods of 10 years or more aren't uncommon in the insurance world.

How to avoid exit fees

Smart investors can avoid exit fees. The easiest way not to pay exit fees is to look closely at investments before you buy them and avoid the ones that charge these fees. You can generally find similar funds that won't impose unnecessary charges.

However, if you're committed to an investment with an exit fee, there are steps you can take to cushion the blow. First, some companies waive the exit fee if you make an exchange to another investment that the company offers. For instance, if you switch from one annuity to another offered by the same insurer, you shouldn't have to pay an exit fee on that transaction.

Also look to see if there's a time limit on the exit fee. It can be feasible in some cases to run out the clock on exit fees, especially if you're close to an anniversary date on which the fee is set to go down or disappear.

Exit fees are sneaky, and by the time you know they're involved in an investment you own, it may be too late. By keeping some simple avoidance techniques in mind, however, you can minimize their impact.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at [email protected]. Thanks -- and Fool on!

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now


Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.