IRA investment advisory fees
I know that investment advisory fees paid directly from an IRA account are not deductible because the fees coming out of the account are not treated as a distribution. What if the taxpayer instead pays the fees for managing the investments in the IRA account from an after-tax source other than the IRA account itself? Are the fees deductible in that case?
Thank you,
Permalink Submitted by Alan - IRA critic on Tue, 2014-03-04 19:19
Paying the fees from outside funds (if the IRA custodian so permits) will be eligible for a misc itemized deduction subject to 2% of AGI floor, so taxpayer must be able to itemize and NOT be under the AMT to benefit in any way. He might also need other misc deductions to get over that 2% floor in total. If taxpayer has a fully qualified Roth IRA, the deduction for the Roth fee would be questionable because the Roth could no longer produce taxable income. In most cases, the fee for a traditional IRA is better off paid directly from the account because it is being paid from pre tax money, but if the taxpayer can fully itemize the fee paying from outside funds would be equivalent.
Permalink Submitted by Arthur Dicker on Tue, 2014-03-04 19:57
Thank you, Alan, for this prompt response.I suppose this is a matter of debate/opinion, but if the taxpayer has sufficient miscellaneous itemized deductions, I think the taxpayer is better off paying the IRA investment advisory fee with outside funds because it preserves the tax deferred nature of the assets in the IRA account for a longer period.
Permalink Submitted by Alan - IRA critic on Tue, 2014-03-04 21:21
While generally this is a toss up, the younger the IRA owner is and the smaller the IRA balance is the more likely the edge goes to the outside payment and deduction. If the IRA owner already has amassed a large IRA and RMDs are getting near, then the edge would probably go to the direct withdrawal of fees from the IRA. Note that another issue for fees that cover taxable, TIRA, and Roth IRA accounts, a total advisory fee must be assigned in accord with the balance of the accounts if fees will be taken directly from the accounts, rather than having the entire fee paid out of accounts other than the Roth IRA.
Permalink Submitted by Arthur Dicker on Tue, 2014-03-04 21:29
Suppose client has a managed TIRA account and a managed taxable account.Each account is assessed an investment management fee based upon its size.Is there something wrong with paying the fees for both accounts from the taxable account?That is, is there some reason why the fee for both accounts paid from the taxable account s not deductible?Thank you.
Permalink Submitted by Alan - IRA critic on Tue, 2014-03-04 21:50
That would be all right and the fees could be deducted. The only issue here is that if the fees include a qualified Roth IRA, the Roth allocation would not be deductible because the Roth will never produce taxable income, which is a requirement of investment advisory fee deductions. The IRS has never clarified the status of a non qualified Roth IRA that “could” produce taxable income if owner took non qualified distributions that included earnings, which would be a contingent generator of taxable income. But once the Roth is qualified and can never generate taxable income it appears the advisory fees could not be deducted. So called “wrap fees” where the fees includes advice, administrative, and commissions can be treated the same as simple advisory fees. Administrative fees from the IRA custodian fall under a different section of the tax code and do not require that the account produce taxable income. So the administrative fee for a qualified Roth IRA as well as other IRAs could be similarly deducted as a misc deduction subject to 2% AGI floor.