Paying Management Fees out of an IRA

Submitted by Craig Cloud on Wed, 2015-07-29 19:08

I am an RIA and have a new client with a Traditional IRA at Schwab. He is 80 yrs old and is currently taking a Required Minimum Withdrawl from his IRA every year. He wishes to pay for my management/advisory fee directly from his IRA account, and was told by his accountant that withdrawls used for this purpose are not considered a distribution that is subject to either 10% penalty or tax of any kind. The Schwab representative told him that since I am not part of the Advisor Group at Schwab (apparently you need more than $10mm under management to be allowed in the group), that if he does this, it will show up as a distribution on his 1099-R and the end of the year, and create a taxable issue for him. Is it possible to avoid having it show up on his 1099 at the end of the year? If that is unavoidable, how does he notify the IRS that this distribution (monthly) is for advisor fees so he doesn’t get taxed or penalized? Thank you



Submitted by Alan - IRA critic on Wed, 2015-07-29 20:14

  • This does not sound right. I would have him re check this with another Schwab rep. While some custodians may not accept direct billing of fees at all, I don’t think it is normal to accept the billing and then include it in the 1099R. Very few taxpayers can both itemize the misc deductions and still have enough other misc deductions to absorb the 2% AGI floor.
  • If he indeed has no choice and the 1099R amount exceeds his RMD due to the fees, he can roll the excess of the RMD back into the IRA. That will only partially offset the downside however, because he still is paying taxes on all IRA distributions and his RMDs are not being reduced due to reduced year end IRA valuation from fee payments.


Submitted by Ed Gunnell on Wed, 2015-07-29 20:25

You will need to use a custodian that will process the fees for you, otherwise it will show up on his 1099R.  I know Scottrade and TradePMR will take RIA’s with smaller balances. If you didn’t transfer the account to another custodian, the client could take a deduction on his Sch A, but it is subject to the 2% limitation.  The means it would not be a complete wash, or he may not get to deduct anything. Example-his AGI is 100k, you manage a 100k account @ 1%.  He can only only deduct the excess of 2k (2% of his AGI).  Your fees on this would be 1k, so no deduction allowed & he has to pay tax on the 1k he withdraws to pay you.  That means he “real” fee would be about 1.35% depending on how much his state tax is.I reviewed the IRS website for anyway around this, and I couldn’t find anything.  I’m interested to see if anyone else has an idea on this.



Add new comment

Log in or register to post comments