Paying fee from IRA
I have heard that there was a PLR in the last few years that allowed for a client to pay their advisory fee from their IRA and it not count as a distribution. I understand the ramifications on the compounding of tax deffered growth. But, sometimes it is the only way. Can someone shed some light on this for me?
Permalink Submitted by Alan Spross on Wed, 2008-08-06 00:59
Having the advisory fee deducted from the IRA has not counted as a contribution or distribution all along as long as it is limited to fees for the particular IRA only.
You may be thinking of the following PLR that allow these fees if part of a wrap fee to be paid from OUTSIDE sources and also qualify for a misc itemized deduction. The following explanation is copied from Ed’s 2006 newsletter:
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IRA Wrap Fees Can Be Paid From Non-IRA Funds
PLR 200507021
IRS has ruled that advisor fees on IRAs known as “wrap fees” can be paid from non-IRA
funds and they will not be treated as contributions. These fees can be deducted as miscellaneous
itemized deductions. The deduction however can be lost since it subject to the 2% of Adjusted
Gross Income threshold and Alternative Minimum Tax. This new PLR applies to wrap fees on
both IRAs and Roth IRAs.
What are Wrap Fees?
Wrap Fees are a name given to an array of investment advisory and broker fees generally
based on the value of your account, as opposed to straight broker commissions which are tied to
an individual stock buy or sale.
Years ago, Revenue Ruling 86-142 held that broker commissions tied to an individual
stock sale are part of the stock sale and must be paid from IRA funds. They cannot be deducted.
Broker commissions paid from non-IRA funds are considered contributions to the IRA. In other
words, you are adding money to your IRA in order to pay fees that should have been paid by
your IRA. Since broker commission on stock transactions in your IRA must be paid from IRA
funds, if you do pay these fees from outside your IRA, not only are they considered additional
contributions to your IRA but you also cannot deduct the commissions like you can for
investment advisory fees. If you pay broker commissions from non-IRA funds and have already
contributed the maximum allowable amount to your IRA, then you have an excess contribution
to the IRA which will be subject to the 6% excise tax on excess IRA contributions.
Revenue Ruling 84-146 stated that trustee fees can be paid from non-IRA funds and
those fees are deductible as a miscellaneous itemized deduction also subject to the 2% Adjusted
Gross Income and the Alternative Minimum Tax. Investment advisory fees fall into this same
category and can be paid from non-IRA funds without being considered an additional IRA
contribution.
This new PLR makes it easier for investors since they do not have to break down the
individual components of the wrap fees and figure out where each of the different types of fees
should be paid from or whether they are deductible. Now IRS has ruled that if they are bundled
or “wrapped” in one overall fee, they can be paid from non-IRA funds without being deemed an
additional IRA contribution, and the fees are deductible subject to the AGI and AMT limitations.
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Permalink Submitted by [email protected] on Wed, 2008-08-06 03:41
Thank you…this is an amazing site. I have been out of the business for a few years. Starting up a new practice Sept 1st. Plan on reading the Q&A on this forum as one of the get up to speed tools. Thanks again!