When is it ok to take fees from an IRA
I have question regarding fees being deducted from an IRA account to cover investment management fees. Our situation is a little different from the other items posted, so I thought a new thread would make sense.
Our clients are a couple that is the same age. The wife has 1 IRA that we custody and manage for them at Schwab. Each of them has an 401(k) with an outside employer, which we also manage as part of their total allocation. However, we are unable to directly debit our fees for the 401(k)’s from either of their 401(k) providers, so the client has been paying our fee for the 401(k)’s out of pocket.
Regardless of whether this is the best approach or not, the client wants all of our fees directly debited from the Wife’s IRA and to be done with writing checks. While I have seen information out there saying not to deduct fees for Roth IRA’s from IRA’s I can’t find anything on this topic. Is there information out there on the topic, if so where?
Would wife be able to deduct fee for her 401(k) and IRA from her IRA?
Would husband who is the same age be able to deduct the fee for his 401(k) from Wife’s IRA?
Does the fact that one is an IRA and one is a 401(k) disallow this arrangement all together?
Permalink Submitted by mk foss on Fri, 2010-12-31 20:50
An individual can deduct IRA management fees if they pay them. If the fees are withdrawn from the IRA, no income tax deduction is available – but rulings indicate there is no adverse tax consequences. If fees to manage a 401(k) plan were paid from an IRA, they would likely be treated as distributions from the IRA and taxable to the owner of the account. If the IRA owner pays tax on fees to manage the 401(k) do they then become deductible? Possibly but the whole transaction seems better to avoid.
You have the same problem if fees for any accounts of the husband are taken from the wife’s IRA. There are a couple of published rulings and 3-4 private rulings that cover this issue. Alan may have the references – they’re not close by for me right now.
The nature of the entity being managed is not a factor – taking any funds other than those for managing the IRA is a problem because it creates a tax liability for the IRA owner.
Permalink Submitted by Richard Feldman on Mon, 2011-01-03 15:29
[quote=”[email protected]“]An individual can deduct IRA management fees if they pay them. If the fees are withdrawn from the IRA, no income tax deduction is available – but rulings indicate there is no adverse tax consequences. If fees to manage a 401(k) plan were paid from an IRA, they would likely be treated as distributions from the IRA and taxable to the owner of the account. If the IRA owner pays tax on fees to manage the 401(k) do they then become deductible? Possibly but the whole transaction seems better to avoid.
You have the same problem if fees for any accounts of the husband are taken from the wife’s IRA. There are a couple of published rulings and 3-4 private rulings that cover this issue. Alan may have the references – they’re not close by for me right now.
The nature of the entity being managed is not a factor – taking any funds other than those for managing the IRA is a problem because it creates a tax liability for the IRA owner.[/quote]
Are you saying that if an individual has 2 different IRA’s (A and B) and you take the fees for both from A that the portion attributed to B would be considered a taxable distribution?
If you could send me some more information regarding the PLRs, I would be most grateful.
Thanks,
Permalink Submitted by Alan Spross on Mon, 2011-01-03 23:51
I would have to do some research to find appropriate PLRs or other IRS guidance. However, if someone has IRAs that can be aggregated for tax purposes, it should not matter which IRA account the fees are deducted from. That said, all of an individuals owned TIRAs can be aggregated, but not with inherited TIRAs, or with Roth IRAs or with inherited Roth IRAs, and certainly not with the IRAs owned by a spouse.
In short, if A and B are both TIRA accounts, the fees for both could be deducted from one of them. But if A is a TIRA and B is a Roth IRA, each IRA should pay it’s own fees.
Otherwise, if you think about it, people would never have their Roth debited since it is already after tax, and the TIRA is pre tax. Having a Roth fee deducted from a TIRA results in the TIRA subsidizing the Roth expenses and fee on a tax free account is being paid from pre tax funds in the TIRA.
As for employer plans, none of these can be aggregated for tax purposes and therefore any fees need to come only from the specific account that generates the fees.