IRA withdrawal to pay fees
Hello,
A client transfered an IRA from one TPA to another. The former TPA did not take out the prorated fees and sent an invoice to the client for the portion of fees due for the last quarter. If the client wires the fees from the new IRA I believe that would be considered a withdrawal and have the 35% income tax and pre 59 1/2 penalties. I beleive a better solution would be for him to pay the invoice with his personal money. If that is the case is it a deductible expense? I am not clear on the 2% AGI and itemized deductions. He is married with combined income of about 250k but I am not sure if he itemizes or is even able to. For a client like that it would probably be a good strategy for him to pay the fees from outside the account anyway as a strategy to increase the amount he is retaining in the IRA. Is that correct thinking as well?
Thanks in advance.
Mark
Permalink Submitted by Alan Spross on Thu, 2009-06-25 22:43
Most people at that income level itemize deductions unless perhaps they have no mortage interest. However, 2% of AGI = $5,000 and only misc itemized deductions that are subject to the 2% that total more than 5,000 can be itemized. He may well have some other misc deductions to add to the fees. However, if he is subject to the AMT he cannot use these deductions anyway. If it turns out that he cannot make use of these deductions or otherwise would rather have them come out of the IRA, it would be much better to determine if the second TPA would accept a billing of the fees from the first TPA and pay them directly out of the IRA as an non reportable expense. That way, the fee is paid with pre tax money, ie money that would be taxed at a high rate if it was distributed from the IRA either now or later. If it cannot be done without reporting, then to avoid the penalty he could just pay it out of his other non retirement assets and avoid a taxable distribution.