Advisory fees in IRA accounts
without going into the billing business, one CPA of one of our clients is stating that the only way we can deduct advisory fees inside a retirement account is to have them direct billed or taken out of a brokerage account. Other accountants we work with just write it off on line 23 on Schedule A. We’ve had other accountants say we can NOT deduct. In reading IRS Pub 529, it appears it can be written off although it is vague. Is there any ruling on this? More importantly, if IRA advisory fees are deductible, HOW do advisors do this without getting into the direct billing business??? Also, FINRA only allows 3% max fee in advisory accounts so if someone has 1Mil in IRA and 100K in a brokerage…..how do we bill that scenario???
TX
David Mailloux
Permalink Submitted by Alan Spross on Mon, 2008-04-21 20:33
David,
You are correct that Pub 529 does not come close to clarifying this and closely related matters.
The only recent IRS guidance came from PLR 2005 07021 which resulted in the allowance of the deduction of wrap account fees for IRAs when paid from non IRA funds. A wrap account includes commissions, advisory, and all other administrative fees as a flat percentage of assets. However, a pure advisory fee by itself is not a wrap account.
What the IRS has not clarified is the restriction of the deduction of investment management related fees to those assets which produce taxable income. Whether a tax deferred account is ineligible because the taxes are not currently due is left up in the air. There is also the question regarding a Roth IRA which is not only tax deferred but tax free when qualified. Therefore, the conservative approach was to break out the advisory fee amount for taxable accounts which qualify for the misc. itemized deduction vrs tax deferred accounts that do not.
I do not follow the direct billing concern. Can’t you just bill for services broken down by account? Taxpayer could then deduct the non IRA portion, unless they have a true wrap account. This should also satisfy the FINRA requirement.
I suspect tax preparers who are aggressively deducting pure advisory fees on IRA account may not be distinguishing them from trustee’s fees, which are deductible as a separate category of misc deductions when paid outside the IRA.