Paying IRA Fees
An IRA is held in a managed account and the account is subject to an investment management fee. If these fees are paid by the IRA owner with assets outside of the IRA, it is my understanding that the portion of fees related to investment advice is deductible as a misc itemized deductions under Sec 212. However if this fee includes any trading costs, that portion of the fee would not be deductible, and paying them with non- IRA assets would be considered a contribution.
There is also the opinion that because this is not a taxable account, the fees are not deductible at all.
Can you please comment on whether the fees can be paid with non-IRA assets and how they may be deductible?
Permalink Submitted by Alan Spross on Wed, 2011-09-07 19:49
A fee based on a % of the account value is known as a wrap fee and the fee includes all expenses including commissions. Under PLR 2005-07021 the IRS ruled that these fees for an IRA account paid with outside funds are not considered a contribution to the IRA. It has been assumed that this also means that the entire fee is deductible as a misc deduction subject to 2% of AGI floor, and the IRS has not questioned this deduction.
Now if the fees are not based on a % of the account balance, ie NOT a wrap fee, then any investment management fees, but not commissions attributed to the IRA, may still be deducted subject to the interpretation of whether the account produces taxable income. The IRS has not defined when the income must be produced, but it seems logical to exclude the deduction once a Roth IRA becomes qualified because it cannot produce any taxable income after that. Other IRA accounts that do not produce taxable income in the specific year, but would have taxable income if a distribution is taken are generally considered to qualify for the investment fee deduction under an aggressive interpretation that the IRS has not challenged to date.
http://www.investmentnews.com/article/20050307/SUB/503070729
Permalink Submitted by Alanna Crawford on Thu, 2011-09-08 13:16
Very helpful, thank you!
Permalink Submitted by chris erickson on Fri, 2012-02-03 21:40
Hello,
I have a slightly different twist on this topic. Scenario is that an investment management fee as a % of Roth IRA value is paid from funds outside the Roth IRA. Technically speaking an investment management fee is not a wrap fee (a wrap fee includes both investment management and suppressed/waived commissions,) but I don’t think that distinction is relevant here.
I do not see how an investment management fee for a Roth IRA, paid with outside funds, would be deductible because the investments never would produce taxable income (Roth IRA owner is over 59.5 years old etc). Having said that, the following law firm has made the inference from the PLR that Roth IRA fees paid from outside the account DO qualify as a misc itemized deduction and my taxable income concern is irrelevant.
http://www.racklaw.com/resources/featured-post-archive/104-irs-allows-de… AND
http://www.racklaw.com/pdfs/featured_posts/2011PLR.pdf
This person also reaches the same conclusion as the previous law firm:
http://www.kitces.com/blog/archives/117-IRS-Re-Affirms-Paying-IRA-Wrap-F…
I cannot make the inference that because the fee is not a deemed contribution, it somehow also qualifies as a deduction. Am I missing something?
Thank you!!!
Permalink Submitted by David Sanchez on Thu, 2012-05-03 21:27
According to Pub 529, under Deductions subject to the 2% limit/Other deductions, both [b]Investment Fees and Expenses[/b] and [b]Trustee Fees for your IRA, if separately billed and paid[/b] are distinct bullet points. They are distinct bullets because they are different things. Many Trustees charge an annual fee (typically $25 – $50) per year as a fee. If this fee is paid separately, it is deductible. However, wrap fees or advisory fees are just that… Investment Fees and Expenses – which are fully deductible regardless of account type.
Am I missing something here?
Permalink Submitted by Alan Spross on Thu, 2012-05-03 23:09
Yes, if you look at the qualifications for these bullet points, Pub 529 indicates that investment fees are deductible if managing investments that produce taxable income. Further, expenses incurred in earning tax exempt income later in Pub 529 are listed as “Non deductible expenses”. The fact that a Roth IRA held until qualification produces tax exempt income makes the investment expenses to manage a Roth IRA problematical. The IRS could well do more to clarify the entire situation with a revenue ruling that clarifies when the deduction can be taken, particularly with respect to a Roth IRA.
In the meantime, the rationale of the IRS is never fully explained. If paying such expenses were deemed IRA contributions, they obviously could not also be deducted a second time, but it is not clear how not being a contribution also makes the payments a misc itemized deduction.
Nonetheless, most tax professionals have been listing investment fees as misc deductions all along, even though they might be pro rating those deductions for those who have significant muni bond holdings since they do not produce taxable income. They are typically treating Roth IRA investment fees just like TIRA investment fees, and the IRS has not challenged this approach.
This means that pure investment management fees are getting the same treatment as wrap fees, even though the two PLRs in 2005 and 2011 only mention wrap fees. Both types of fees are usually based on a % of the account value rather than being tied to specfic holdings as commissions are. So the largest change here is that wrap fees include commissions which would never have been misc deductions before the first PLR.