Can management fees deducted from an IRA be “reimbursed”?
Let’s say John Doe has an IRA. He pays investment management fees to an investment manager based upon a percentage of assets in the IRA. The investment manager deducts the management fee directly from the IRA account. The investment manager will not bill their fee directly or from an account with non-qualified funds.
Essentially, John Doe is paying investment management fees (a normally deductible expense) with qualified dollars, thus missing out on the tax deduction. Can John make deposits to his IRA in excess of the annual contribution limit in order to reimburse the IRA account for the management fees deducted?
If not, are there any alternative strategies John can use to deduct his management fee expenses?
Permalink Submitted by Alan Spross on Mon, 2010-10-11 23:47
If the advisor will not bill outside the IRA, there is no alternative to the IRA value being reduced. There is no provision for replacement or supplemental contributions to the IRA to replace these fees. Many firms will bill outside the IRA upon request and that preserves the IRA value as well as the possibility of a misc itemized deduction.
That said, if the IRA is not a Roth IRA, the direct debiting of the fees is not a taxable distribution so the fees are being paid out of pre tax dollars. That is preferable in many cases for those who cannot itemize deductions, who lose their misc deduction to the AMT, or who do not exceed the 2% of AGI floor for the misc deduction. For those who have both TIRA and Roth IRAs, it is a violation to bill the entire fee to the TIRA for obvious reasons.
Permalink Submitted by mk foss on Tue, 2010-10-12 00:30
I usually recommend that my clients have the management fees deducted from the IRA during the “accumulation phase” – to give a better idea of the manager’s investment performance. Once they begin RMDs we look at that decision again.
Permalink Submitted by Nancy Maugel on Tue, 2010-10-12 14:38
Thank you both for the answers. They were as I suspected but I was hoping there might be some obscure private letter ruling addressing the subject that I was unaware of.
I have a related follow up question.
Let’s say a custodian directly debits their custodial fees from John’s IRA. John is unable to pay the fees as his IRA only has illquid, non-cash holdings. John owes his custodian fees of $100. The custodian will not direct bill. If John deposits $100 into his IRA to pay the fees, is that considered a contribution to his IRA?
Permalink Submitted by Jose Morales on Tue, 2010-10-12 16:52
[quote=”[email protected]“]I have a related follow up question.
Let’s say a custodian directly debits their custodial fees from John’s IRA. John is unable to pay the fees as his IRA only has illquid, non-cash holdings. John owes his custodian fees of $100. The custodian will not direct bill. If John deposits $100 into his IRA to pay the fees, is that considered a contribution to his IRA?[/quote]
Yes, it would be considered a contribution.