IRA Investment Management Fee Limits

Submitted by Toby Prestegaard on Fri, 2017-12-08 20:36

How does the IRS determine what fees are attributable to an IRA vs not. If someone has a NQ account and an IRA, and both are being charged an AUM investment fee, does the IRS opine on what may be excessive from one account over the other? In other words, could you have a 2.5% fee on the IRA and a .25% fee on the NQ if you wanted to take most of the overall fee from the IRA? Assuming the client is retired, and will have excessive RMDs when they begin, and would prefer to look at taking as much of the overall investment management fee from the IRA as possible.

I understand that the fee can only be taken from the IRA to the extent that it is incurred by the account, but does that mean a firm could charge a higher percentage of a management fee to the IRA?



Submitted by Alan - IRA critic on Fri, 2017-12-08 23:24

  • They could charge a different rate if they break it out in writing. Otherwise, if you are only given a total fee it would be risky not to apply it ratably to the average account balance for the year. The IRA custodian should not be willing to deduct more from the IRA (these payments are not reported as distributions) than the amount that actually was applicable to the IRA. 
  • The same approach should apply with respect to applying the correct amount to your Roth IRA vs. TIRA. The custodian should not be deducting Roth IRA fees from a TIRA account.
  • Fees deducted directly from a TIRA are of course paid pre tax. However, if you happen to have a “Wrap fee” agreement which includes IRA commissions, management fee, and administrative IRA fee as a single amount, the IRS has ruled in PLR 2005 07021 that you can deduct as a misc deduction subject to 2% AGI floor if you pay that fee with outside funds. Of course, if you cannot itemize, the 2% eliminates the deduction, or the AMT eliminates the deduction this option will not be helpful other than to preserve IRA assets. And no telling what will happen to this misc deduction under tax reform as itemized deductions shrink and std deductions rise.

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