Dear Vince, some IRA management fees, whether or not you make distributions, are deductible but must be paid from the account holder`s non-IRA funds. You are right that investment expenses paid to earn taxable income are tax deductible. These expenses are other individual deductions that are subject to a total reduction of 2% of adjusted gross income. The first question that arises is simply whether investment management fees can be deducted if they are paid in the name of IRA assets, since IRAs are tax-deferred and do not create any current income. Fortunately, this issue has been addressed, most recently in PLR 201104061 (previously discussed in this blog), which confirmed that wrap fee-type agreements such as assets under management fees and investment advisory fees can be paid with external taxable dollars are still deducted as expenses under Section 212 (a position the IRS has continued to support since the PLR 8830061). In previous decisions (9005010 of PLR and 200507021), the IRS has also confirmed that paying fees on behalf of an IRA is not treated as a constructive contribution to the account (which would otherwise have exceeded the annual contribution limits). While the tax changes eliminate the tax deductibility of investment management expenses, this is not a big loss for many investors. The amount of the fee had to exceed 2% of the adjusted gross income, and many of them did not pay fees in excess of the income they earned each year. It`s worth noting that the standard deduction has almost doubled under the new law, so you might be able to easily offset the tax savings you`ve lost. Under the new tax laws, you will no longer be able to deduct administration fees from the IRA. Experienced investors who want to take a more active role in their portfolio decisions can transfer their investments to a low-cost brokerage and take responsibility for their own portfolios by investing in low-cost exchange-traded funds or mutual funds. This option is not for investors who do not know how to do it, which means that paying the management fee may be the best option, even if the management fee is no longer deductible.
The key to deducting ira fees is to cut a check or use a credit card to pay the broker the annual maintenance fee. For example, if your broker charges you $150 per year for the IRA, you will have to pay that non-IRA assets to the broker for it to be deductible. The payment is not considered as an additional contribution, but as another individual deduction. Prior to 2018, you could partially or fully deduct investment advisory fees from your federal tax return. However, when the Tax Reductions and Employment Act was passed, the other individual deduction for investment expenses and expenses disappeared. So if you use Schedule A to list deductions instead of the standard deduction, your IRA custody/management expenses can be deducted. You might be tempted to pay these fees by check using after-tax dollars because it`s easy, but there might be a better way if you have money in an IRA. In particular, it is required that expenses be deductible to be attributed to income, which the IRS has interpreted to mean taxable income; As a result, investment management fees for tax-exempt investments, such as municipal bonds, are not deductible. However, traditional investment advisory expenses, including assets under management and continuous development expenses, are generally deductible as long as they are not directly attributable to the management of tax-exempt assets. Under the new law, asset management expenses are no longer tax deductible. But there`s still a tax-efficient way to pay for these expenses: you can take money from your IRA to pay the fees without paying taxes or prepayment penalties.
This can be a good strategy for a traditional IRA, but it doesn`t provide an extra break for a Roth IRA. These annual IRA administration fees may be tax deductible under the individual deduction rules. As long as the fee is charged separately and paid for the use of IRA funds. In other words, IRA administration fees paid in cash or by personal cheque and not deducted from ira can be deducted as investment costs, subject to disaggregated deduction limits. The real answer is that “it depends” – specifically, whether or how much of the expenses would have been deductible if they had simply been paid with external dollars instead. Finally, the main advantage of paying fees from a retirement account is the ability to pay them with pre-tax dollars – since the retirement account is by definition before tax. If the expenses would have been fully deductible anyway if they had been paid with external dollars, it is better to simply pay with external dollars and allow the IRA to maximize its continued tax-deferred growth. The answer usually depends on a variety of factors, particularly the amount of IRA expenses that would have been deductible if it had simply been paid with external/personal dollars, rather than based on individual deduction rules.
The advantage of paying for IRA custody and management fees from a retirement account is the ability to pay them with input tax money. If the expenses had been fully deductible if they had been paid with personal/external dollars, it is best to simply pay with external dollars and allow the IRA to maximize its continued tax-deferred growth. Although, in reality, IRA custody/management expenses are often not fully deductible due to the 2% AGI floor for various individual deductions and due to the scope of the alternative minimum tax (“AMT”). In any case, it`s usually always best to use personal funds to pay for the IRA`s custody/investment management fee for a Roth IRA, even if the fee is not deductible. This is a return or profit that has never been reported to you because this part has been used to pay expenses directly. You do not need to add up your mutual fund fees and claim them as a deduction for this reason. Some investment advisors offer financial planning services as well as tax preparation services. They are usually provided as part of a bundled service offering and calculated based on a percentage of assets under management. You may find that these services are surprisingly reasonable when you look at after-tax costs for taxation years where these costs are deductible.
Investment management fees and financial planning fees can be considered as various individual deductions on your tax return, such as . B for preparing tax returns, but only to the extent that they exceed 2% of your adjusted gross income (GII). Unfortunately, however, the expenses must be claimed as another individual deduction, which means that the expenses are limited to an AGI floor of 2% and are also an AMT adjustment and are therefore not deductible for AMT taxpayers. Although some taxpayers have tried in the past to avoid this adverse outcome by activating fees instead (i.e. Add them to the title`s cost base, similar to transaction fees), the IRS ruled that this is not an authorized treatment; For better or worse, customers should claim the fees as well as possible and take advantage of the deduction they may or may not end up receiving. The IRS allows you to deduct expenses related to an investment, such as . B a brokerage account where you buy and sell stocks, bonds and mutual funds. If the broker charged a commission on a trade, the commission will be added to your cost base and deducted from the proceeds of the sale when calculating the capital gain or loss. These expenses can still be paid before tax under the new tax law. Many financial advisors recommend separately managed accounts instead of mutual funds for high-net-worth families with a large number of invested assets. They own the shares directly, so there is no expense ratio. Instead, all fees are paid in the form of an investment management fee, which is debited from the account.
If you want to reduce the impact of management fees on your portfolio, there are options to optimize your returns. One path you should take is to change your actively managed portfolio to a more passive one. Two examples of this are the move to a bond fund (usually with lower fees than an actively managed fund) and the switch to a lower-cost fund such as an index fund. While the treatment of investment advisory fees is relatively straightforward if they are paid for or from a taxable account – expenses are deductible in the year paid as a section 212 expense, and the client may or may not derive a tax benefit from it after applying for it as another individual deduction subject to the AGI`s 2% floor – the question is a little more complicated, when it comes to retirement accounts. Have you ever thought about deducting your childcare/fiduciary expenses from your taxes? This would be fun considering you would probably have to talk to your trustee/fiduciary about it. .