Deducting financial planning fees from IRA
We charge a flat quarterly fee for our financial planning services and part of the services included in the engagement is investment management. The client has asked if we can start deducting our fee directly from his IRA. Under our AUM schedule (not the engagement he falls under), the fees charged is surprisingly close to his quarterly financial planning fee (AUM would be higher).
Would a portion of the fee be considered a distribution for personal expenses (financial planning) or could it be argued that 100% falls under investment management? I want to avoid causing an unplanned taxable event but finding guidance on this has been difficult.
Permalink Submitted by Alan - IRA critic on Fri, 2020-08-21 15:58
Financial planning fees are not covered under Sec 212, therefore cannot be pulled directly from an IRA without creating a prohibited transaction. Therefore, the portion related to investment management should be identified and the direct payment from the IRA limited to that amount. Obviously, such fees most also be pulled in proportion to the services applied to a particular account, so if the client has both a TIRA and Roth IRA, expenses that should be allocated to the Roth should be deducted from the Roth and not from the TIRA. Expenses allocable to a taxable account should also not be deducted from an IRA. As you indicated, payment is probably simpler under the AUM model. The client is smart to have what is eligible deducted from the TIRA in particular since that is the only way to pay these fees with pre tax dollars now that the misc deduction is suspended.