Advisory fees within traditional IRAs
Can a client who is paying a wrap fee from within an IRA or Roth IRA itemize that expense for income tax purposes? I have received conflicting advice from CPAs, two different investment firms I have worked for as well as colleagues. In the mid 90’s, I was told the wrap advisory fees had to be paid outside of a qualified account. In 2007 I was told to refer to IRA publication 550, some “gray” area had been cleared up and the firm believed there was nothing preventing you from itemizing these fees. My CPA agrees with this viewpoint. Several of my client’s CPAs do not agree. The latest twist is that somehow the advisory fees have to be tied to the production of income from the retirement account in order to be deductable. While we cannot give tax advice, I would really like to know the answer to this question once and for all as well as where to point clients and/ or their CPAs who want clarification.
Permalink Submitted by Alan Spross on Fri, 2011-08-05 22:47
The clarification came from IRS PLR 2005-07021. This letter ruling indicated that paying the wrap fee from outside the IRA was not deemed to be a contribution to the IRA because the fee was a based on the IRA balance and not on individual transactions. While not specifically included in the ruling, the conclusion has been universal and not questioned by the IRS that the wrap fees can therefore be claimed as a misc itemized deduction subject to 2% of AGI and possible AMT limitations. For a Roth IRA, particularly a qualified Roth IRA, the deduction probably does not fly due the requirement that the investment expense deductions are for assets that produce taxable income and a qualified Roth IRA will not produce taxable income.
Wrap fees can also be paid from the IRA funds if desired. If the client cannot itemize then it often works out best to pay the fees from the IRA (TIRA but not a Roth IRA) because the fee is being paid out of pre tax dollars rather than already taxed dollars. This may particularly work out better for older clients with large IRAs and no particular need or opportunity to build up tax deferred dollars due to RMDs. Paying from a Roth IRA does not make sense however because the dollars have been taxed, earn tax free, and do not have to come out as RMDs.
Permalink Submitted by mk foss on Sat, 2011-08-06 00:33
I advise my clients to have the fees paid from the IRA itself during the accumulation phase – while they’re still working and to pay them separately once withdrawals begin.
The 2% limitation may prevent a tax benefit while they’re working and I think it’s a better gauge of the performance of the IRA to see how it grows considering the menagement fees.
Once RMDs begin, they may more readily benefit from the deductin of the fees.