Deductibility of Roth IRA inv. mgmt. fees paid by check
Hello,
I have a slightly different twist on a previous topic. Scenario is that an investment management fee (calculated 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 qualify as a misc. itemized deduction 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 a PLR that Roth IRA fees paid from outside the account DO qualify as a misc itemized deduction and my taxable income concern is irrelevant. Please take a look at:
http://www.racklaw.com/resources/featur … -wrap-fees AND
http://www.racklaw.com/pdfs/featured_posts/2011PLR.pdf
Another person also reaches the same conclusion as the previous law firm:
http://www.kitces.com/blog/archives/117 … llars.html
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 Alan Spross on Fri, 2012-02-10 21:26
Good questions, but there is no IRS clarification of some of these issues.
PLR 2011 04061 basically confirmed the findings of PLR 2005 07021. In the latter PLR there was no mention of itemizing the fees, but several tax experts seem to have concluded that the deduction flowed automatically from the ruling that the payment was not an IRA contribution. Further, there is no firm definition of what must be included in a wrap fee but the PLR seems to point toward the fee being a flat fee based on account balance as the primary requirement. Finally, the IRS has not commented on how a Roth IRA would be considered as producing present or future taxable income, ie. is it qualified until it is itself a qualified Roth IRA or not at any point? Sec 212 does say that the income must be taxable, but does not have to be currently taxable.
Even before these PLRs, many aggressive taxpayers equated investment management fees with trustee fees and deducted them under that section of the code. In more recent years the Roth IRA and the modern wrap fee have emerged as extended questions regarding investment fees deductions.
Therefore, there is no firm answer to your question which encompasses several tangential issues. The deduction of a pure investment (advice) fee is likely to be on weaker ground for Roth IRAs than for pre tax IRAs. A conservative taxpayer might take the IRA portion of the fees and break out the pre tax IRA portion as a % of assets and only deduct that portion of the fee.
Permalink Submitted by chris erickson on Sat, 2012-02-11 13:49
Thank you Alan for the thorough reply!