Billing an IRA account as an RIA
If an investment advisor has a client with an IRA account and deducts the fees directly from that account, is my belief correct that the fee would be considered a distribution subject to income tax and the 10% early withdrawal tax if applicable?
Thanks,
Anthony
Permalink Submitted by mk foss on Fri, 2009-06-05 18:26
The IRA owner is not taxable on payments made to an RIA from the IRA. However, if the RIA fees are initially paid by the IRA owner and then reimbursed by the IRA, those payments would be treated as a distribution and subject to income tax and the 10% penalty tax (if owner is under 59.5).
The IRS has issued some rulings on questions similar to this. A private ruling in 1988 discusses this scenario.
Permalink Submitted by Alan Spross on Fri, 2009-06-05 19:30
A related issue for clients that have both TIRA and Roth IRA accounts is that such fees should be properly apportioned between the two types of IRAs. A client might prefer that the TIRA pay the entire fee, but the IRS would not consider the assignment of fees proper if Roth fees were allocated to TIRA accounts. If that was done, they might consider the portion that should have been a Roth fee to be a taxable distribution from the TIRA. If client only has multiple TIRA accounts, then it should not matter which one was billed.
Permalink Submitted by Alan Spross on Fri, 2009-06-05 21:16
The answer was “No”. Note on the first response, “the IRA owner is not taxed” on the distribution. There should be no 1099R issued in that situation, and nothing for the IRA to owner to report on their return. If the IRA owner pays the advisor first and then reimburses himself, that is different and would be taxable.
The RIA could also bill the advisor fees separately and if the owner pays them with outside funds, the owner would be entitled to a misc itemized deduction subject to 2% AGI limit and also subject to AMT limitations.