ROTH IRA and investment management fees
Are management fees paid to an investment manager on funds in a ROTH IRA deductible by taxpayer on Schedule A? With respect to a regular IRA if such expenses are paid directly by the taxpayer, such expenses are potential deductions. Since distributions from a ROTH IRA will not be taxable is there a specific code section, ruling, etc., which disallows the deduction for the management fees paid for a ROTH IRA other than the general rules / provisions of IRC §265 or §212? Do the general rules of IRC §265 and §212 apply in this case?
Permalink Submitted by mk foss on Tue, 2008-12-23 19:22
The general rule of Section 212 should apply to the Roth IRA. Investment management fees paid for a stock/bond portfolio are only deductible to the extent attributable to taxable income.
In addition, legal fees attributable to a settlement that is partially taxable and partially tax exempt must also be allocated under Section 212 to taxable income.
I can’t see any difference in this case.
Permalink Submitted by Alan Spross on Tue, 2008-12-23 22:09
Mary Kay,
How do you see the following portion of Sec 212 affecting this? The lack of IRS guidance on this issue raises many questions year to year, even with the tax deferred TIRA. With the Roth, it appears arguable that until the Roth account is qualified the earnings are not tax free, just tax deferred, and the account is similar in many respects to a TIRA with a high basis. With both types of IRAs in the accumulation phase, it appears we are dealing with income the taxpayer “may realize in subsequent taxable years” (see below) . The IRS could certainly lend a hand here by addressing this in Pub 550, p 35. I suspect lack of clarity is resulting in inconsistent treatment of this between tax preparers.
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(b) The term income for the purpose of section 212 includes not merely income of the taxable year but also income which the taxpayer has realized in a prior taxable year or may realize in subsequent taxable years; and is not confined to recurring income but applies as well to gains from the disposition of property. For example, if defaulted bonds, the interest from which if received would be includible in income, are purchased with the expectation of realizing capital gain on their resale, even though no current yield thereon is anticipated, ordinary and necessary expenses thereafter paid or incurred in connection with such bonds are deductible. Similarly, ordinary and necessary expenses paid or incurred in the management, conservation, or maintenance of a building devoted to rental purposes are deductible notwithstanding that there is actually no income therefrom in the taxable year, and regardless of the manner in which or the purpose for which the property in question was acquired. Expenses paid or incurred in managing, conserving, or maintaining property held for investment may be deductible under section 212 even though the property is not currently productive and there is no likelihood that the property will be sold at a profit or will otherwise be productive of income and even though the property is held merely to minimize a loss with respect thereto.
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Permalink Submitted by mk foss on Tue, 2008-12-23 23:18
This is a very difficult area. The methods that IRS has approved for allocating expenses when they produce income some of which is tax exempt normally look to how much of the income was or will be included in taxable income. They approved methods in GCM 39669 and Rev Rul 87-102 that allowed a portion of legal fees paid to collect Social Security or Social Security Disability payments by the ratio of taxable vs tax exempt social security in the year the expense was paid rather than considering that in another year a larger portion of the income would be taxable.
An invesment manager is investing all of the ROTH funds in any given year and I don’t see how you could allocate them to income that might be reported if the ROTH is cashed out before 5 years.
Permalink Submitted by Al Fry on Wed, 2008-12-24 16:03
Also, I believe these are subject to the 2% floor for misc deductions.