Question: I have a financial advisor managing my retirement accounts. Can I deduct his charges when I file my tax return? I am on extension until October 15th and looking for deductions. I have heard from several people who say you can, but I'm still a little hesitant. Also, can I pay the fees for management of my IRA account from my IRA?
Answer: The IRS considers investment management fees as expenses for the management of property held for the production of income and allows you to deduct them as a miscellaneous itemized deduction along with other miscellaneous itemized deductions including tax preparation fees. You report your miscellaneous itemized deductions on Schedule A of your tax return and then you reduce them by subtracting 2% of your Adjusted Gross Income.
For example, let’s assume your investment advisory fees were $10,000 on your $1 Million dollar portfolio, and your tax preparation fee was $1,000. Also assume that your AGI was $100,000. Your total miscellaneous itemized deductions of $11,000 will be reduced by $2,000 (2% of $100,000) leaving a deduction of $9,000. If you are subject to the alternative minimum tax, your miscellaneous itemized deductions along with certain other itemized deductions, including the state and local taxes you pay, may not count.
If you are working and trying to maximize your contributions to your retirement plan, then you should consider paying the investment management fees from outside funds. The fees are deductible as explained above and you will leave more money in your retirement fund to grow tax-deferred.
However, if you are retired and no longer contributing to your IRA or other retirement plan, then you may be better off paying the management fees from inside the retirement account. That’s because an advisory fee withdrawn directly from a retirement account is not reported as taxable income. Nor is it tax deductible. Think of it as a tax-free withdrawal.
Here is an example. Rob and Mary Jane, both single, are retired and have $1 million IRA accounts. They each pay a $10,000 investment management fee. Rob withdraws $40,000 from his IRA this year and pays a $10,000 investment management fee using outside funds from his checking account. He reports a $40,000 taxable IRA distribution on his tax return and claims a $10,000 miscellaneous itemized deduction that may be reduced by the 2% AGI limit, depending on his AGI and what other miscellaneous deductions he can claim. Mary Jane withdraws $30,000 from her IRA and her advisor draws her $10,000 investment management fee from that account. Because Mary Jane paid her management fee from funds inside her IRA, her reportable IRA distribution is $30,000 even though her total withdrawal was $40,000. Rob and Mary Jane both withdrew $40,000 from their IRA accounts, but Mary Jane has $10,000 less taxable income and Rob has a possible $10,000 tax deduction. Your tax practitioner can run the numbers for you to see which way works best.
Question: Can I pay the fees for my Roth IRA from my traditional IRA?
Answer: No. It would be a nice way to save taxes if you could, but you can’t use traditional IRA money to pay fees on other investment accounts, including Roth IRA accounts.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.