Have you ever thought about deducting your custodian/trustee fees from your taxes? That’d be fun, considering you’d most likely have to talk to your custodian/trustee about it.
Many retirement account holders don’t know their payment IRA custodian/trustee fees may in fact be tax-deductible. The irony is not lost on us.
Example of an IRA Custodian Tax Deduction For Investors
According to the IRS rules, in place of the standard deduction, you can deduct certain expenses as miscellaneous itemized deductions on Schedule A.
But you can only claim the amount of expenses that is more than 2% of your adjusted gross income.
For example, Alexander is a single taxpayer who has an adjusted gross income of $50,000. He may deduct her miscellaneous itemized deductions only to the extent that they exceed 2% of $50,000, or $1,000.
Facts About IRA Tax Deductions
- Some of the more popular itemized deductions are for: charity contributions, mortgage interest, tax preparation fees (ironically), medical and dental expenses.
So if you’re using Schedule A to itemize deductions in place of taking the standard deduction, your IRA custodian/management fees can be deducted.
- There are over 50 million IRAs.
- The majority of all IRA accounts are subject to small annual administration fees, which generally cover basic paperwork and maintenance of the account.
These annual IRA management fees may be tax deductible, according to the itemized deduction rules. As long as the fees are separately billed and paid for using IRA funds.
In other words, IRA management fees paid by personal cash or check that are not deducted from the IRA may be deducted as investment expenses, subject to the itemized deduction limits.
- IRA Custodian fees are also not considered part of the total IRA contribution for the year.
On the other hand, IRS rules state that if your IRA administrative/management expenses are paid directly from the IRA, such payment will not be considered a distribution from the IRA.
For example, if you contribute the maximum for a person under age 50 ($5,500 as of 2018), and your trustee deducts $200 from the account for advisory or custodian fees, the fee paid would not be considered a distribution.
Note: You cannot increase your IRA contribution to compensate for that amount.
How To Pay IRA Fees To Get A Tax Deduction Properly
You have to pay IRA management/custodian fees with the money in a retirement account (which is subtracted directly from the account without tax consequences) or pay the fee with outside/personal dollars instead. Only then can you claim the itemized deduction.
The same applies to a retirement account where you are subject to investment management fees associated with the retirement account.
The IRS recently confirmed that “wrap fee” style arrangements like ongoing asset under management and investment advisory fees can be paid with outside taxable dollars and still deducted as Section 212 expenses, subject to the itemized deduction limits.
The determination of whether the IRA administration/management fee is deductible is dependent on how it is billed. For example, if the money simply comes out of any cash balance in the IRA, then you can’t deduct it.
Instead, for tax purposes the fee is offset against earnings in the account when you begin withdrawing the retirement account funds.
But if the IRA administrator/trustee bills or invoices the individual separately and allows you to pay from another source, then the fee may be deductible for the year in which it was paid.
However, because of the “prohibited transaction” rules a transaction can be subject to tax and penalties.
Note: Make sure personal expenses are NOT paid using retirement funds or vice versa. This will help you avoid costly penalties.
Given that IRA custodian and related investment advisory fees can be paid from retirement accounts, as long as the fee is attributable only to the retirement account.
Close readers and smart investors (we’re pretty sure that’s all of you) may still have one question.
Given the Choice, Should You Pay IRA Fees with Retirement or Personal Funds?
The answer is generally dependent on a variety of factors, specifically, on how much of the IRA fee would have been deductible if it was simply paid with outside/personal dollars instead based off the itemized deduction rules.
The benefit to paying the IRA custodian/management fee from a retirement account is the ability to pay it with pre-tax dollars.
If the fee would have been fully deductible if paid with personal/outside dollars, then it’s best to simply pay with outside dollars, and allow the IRA to maximize its ongoing tax-deferred growth.
Although, in reality, IRA custodian/management fees are often not fully deductible due to the 2%-of-AGI floor on miscellaneous itemized deductions and due to the reach of the alternative minimum tax (“AMT”).
In any event, it will generally always be preferable to use personal funds to pay the IRA custodian/investment management fee for a Roth IRA, even if the fee is not deductible.
Get Professional Help Managing Your IRA Retirement Account
The ability to deduct IRA custodian/trustee fees can be a nice tax benefit to many IRA account holders itemizing their tax deductions. However, the process can be time consuming, so it’s not advised unless you have a lot to gain from doing so.
If you want to learn more about deducting your IRA management fees, call Royal Legal Solutions today at (512) 757–3994 or schedule your consultation online.