Investment Advisory Fees deductibility on an IRA
I have an IRA Rollover for a client held at Schwab Institutional. The Schwab Account Agreement allows for Investment Advisory Fees to be deducted directly from the IRA as opposed to separate billing for these fees (fees are deducted quarterly from client’s account).
Questions: (1) If these quarterly Investment Advisory Fees are deducted directly from the client’s IRA and then paid directly to the broker/dealer and then paid to the broker (me), are these Investment Advisory Fees tax deductible for the client? (2) Would custodial and/or trading fees assessed by Schwab for trading transactions in this IRA Rollover and taken directly from the account be tax deductible?
In my network of accounting professionals, in response to these two questions a few CPAs have said yes both and a few have said no to both. The “no” argument is that the IRA monies are pre-tax dollars and my client cannot take a deduction for these fees because of that status — they recommend that my client be billed separately for the Investment Advisory Fees and pay for these fees with after-tax money held in a bank or brokerage account in order to qualify for the deduction.
Please opine.
Permalink Submitted by Jim Shope on Tue, 2014-09-23 18:06
From one advisor to another, note that I am not an attorney nor accountant. 1. My understanding has always been that advisory fees charged from an IRA cannot be claimed on Schedule A. If the client has a separate taxable account, that account can be used to pay the advisory fees and can be included on Schedule A. 2. I think IRA annual fees that are paid for outside of an IRA can be claimed on Schedule A too, but not if deducted directly from an IRA.
Permalink Submitted by Alan - IRA critic on Tue, 2014-09-23 19:11
I agree. No deduction is allowable for any expenses paid directly from an IRA in a non reportable transaction. This is also true for a Roth IRA even though the Roth was funded with after tax money. Client’s given the option to pay the expenses (including wrap fees since 2005) with outside funds can take a misc deduction subject to the 2% floor if they can otherwise itemize. But the AMT would erase this deduction, if applicable. It is also important to note that advisory fees for the taxable account balance cannot be deducted from the IRA without reporting on a 1099R as a taxable distribution. And if a client has a Roth and a TIRA, either the fees must be paid out of taxable or allocated proportionately to IRA type. Fees for IRAs can be paid from taxable, but not vice versa without a taxable distribution.