Roth investment advice

Submitted by Jeffrey DuFour on Tue, 2009-03-24 17:58

Can anyone give authority for deducting (or not deducting) investment advisory fees for a Roth IRA paid with funds outside the Roth IRA?



Submitted by Clyde Wolf on Tue, 2009-03-24 20:45

Jdufour,

Such expenses are deductable on 1040 Schedule A, line 23. This is a miscellaneous deduction subject to 2% AGI limit.

Submitted by Clyde Wolf on Tue, 2009-03-24 20:47

I should have included IRS PUB 529, Miscellaneous Deductions.

Submitted by Alan Spross on Tue, 2009-03-24 21:00

There is no good authority I am aware of relating to the central issue of required taxable income generation from either a Roth or a TIRA.

If these fees are included as part of a “wrap” account fee structure, they are deductible because they are considered trustee fees rather than advisory fees used to produce taxable income. See PLR 2005 07021, which is generic enough to reasonably be relied on.

Beyond wrap fees, the deduction becomes clouded because the IRS has not defined when and IF the taxable income must be realized, or the types of accounts that qualify. With a Roth IRA most earnings are distributed tax free after qualification, however in a year in which a distribution is taken that is at least partially taxable, a taxpayer realizes current taxable income from the Roth, and the deduction would likely not be questioned. Of course, the 2% of AGI, AMT loss of deduction, and total amounts exceeding the standard deduction all present hurdles to actual application of this deduction.

Submitted by mk foss on Wed, 2009-03-25 00:02

Rev Rul 84-146 allows fees that are separately billed to be deductible for an IRA. The focus in that ruling and a series of private letter rulings (including what Alan cited) was that payment of the fee was not an additional deduction to the IRA – that would put someone over the limit for contributions for the year.

Other rulings look at whether a fee should be capitalized or not. There is no discussion of the fact that income is tax deferred in the IRA. The tax free nature of the Roth has not been discussed in any rulings that I’ve seen.

Submitted by Jeffrey DuFour on Wed, 2009-03-25 19:23

thanks. I already looked at Pub 529 and the opening language seems compelling – the expenses must be to “produce or collect income that must be included in your income” ” or to “manage conserve property held for such income”. It’s true they talk about “your IRA’ later on without differentiation, but that doesn’t give me complete comfort given the first part. It reads like the law.

I guess its possible to argue the Roth could someday create taxable income and fit the bill for a current deduction. However, you could equal argue a muni bond might produce taxable income if you sold it at a gain.

I looked at the PLR too – since it really goes after the excess contribution issue and little else, I don’t think it gets to my question. Of course, the Rev Rul was pre-Roth.

You have confirmed my initial research that there isn’t any on point authority. I may have wiggle room due to the vagueness of the Pub. That said, its hard to believe this issue isn’t out there somewhere.

thanks all

Submitted by Alan Spross on Wed, 2009-03-25 21:38

With respect to the PLR, it is widely accepted among tax professionals that when expense payments are not deemed to be IRA contributions, that they would then be automatically deductible. I know that this was not overtly covered in the ruling, but that is the consensus. However, note that the ruling only applies to wrap fees, not to separate billings for commissions or advisory services.

I also tend to agree that continued silence on the part of the IRS for this many years is inviting aggressive tax decisions regarding potential deductions. I suspect that many advisory fees are going down as itemized deductions, or similarly are being overweighted toward the taxable account holdings vrs the IRAs. Many brokers are billing these fees to taxable accounts instead of allocating the billings according to asset size.

Submitted by Jeffrey DuFour on Wed, 2009-03-25 22:03

thanks again – i will be in Baltimore this weekend. Maybe I’ll bounce it off Ed in the Q&A 🙂

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