Paying IRA Advisory Fees
I understand that advisory fees that are directly debited from an IRA account by an investment advisor are not considered to be a distribution. If the advisor has no ability to debit directly, can the individual take a distribution from the IRA and use it to pay the advisory fee without having to pay tax and penalty on it? I don’t see how this is different than that the advisor debiting directly, but I get the feeling it is treated differently by the IRS. Thanks in advance for any responses.
Permalink Submitted by Alan Spross on Tue, 2010-10-05 19:44
If the IRA owner takes a distribution from the IRA to pay any related fees including advisory, wrap or administrative fees, it must be reported as a taxable distribution. But when these fees are debited directly from the account by the custodian, they are not considered a distribution. Whether you pay the fees from a taxable distribution or pay them from other funds, the payment may be deductible as a potential misc itemized deduction subject to the 2% floor, but also subject to loss due to AMT.
Whether it is better to pay the fees directly from the account or from outside funds depends on many variables and the type of IRA is also a factor (TIRA or Roth).
PLR 2005 07021 authorized wrap fees to be debited directly from an IRA and there is no reported distribution.
The IRS has never clarified the deduction for pure advisory fees in light of the fact that Pub 529 specifies that the deduction applies to an investment that produces taxable income. With respect to a Roth IRA, it might produce taxable income until it is qualified, but not afterwards. Nonetheless, most tax pros routinely deduct investment advisory fees as a misc itemized deduction without regard to whehter the account will ever produce taxable income in the future.