Custodial Fees and Itemized Tax Deductions

by Fraser Sherman Google

    When you have to pay investment fees you can deduct them on taxes. You take the write-off as one of the 2 percent deductions on Schedule A. They get the name because you add all investment fees and other 2 percent deductions together, then subtract 2 percent of your adjusted gross income. You take a write-off for anything that's left after that.

    Whether your IRA custodian works for a bank or a broker, you usually pay a fee for her IRA services. You can write off the bills as an itemized 2 percent deduction, just just as you do with your other investment fees. If you pay your custodian for IRA investment advice, you can write that off as as well, along with any financial newsletters, magazines or papers you buy for tips. All your expenses fall into the 2 percent category.

    With IRAs, you have another option that can work out better: pay custodial fees from the account. If you have a $200 annual fee coming up, tell the broker to take it out of the IRA. As the IRA consists of pre-tax dollars, this takes less money out of your pocket than if you pay him with after-tax dollars. You only get to do this with one-size-fits-all administrative fees. Fees based on the value of the assets in the account have to be paid from other money.

    Paying your fees from a traditional IRA's pre-tax dollars makes financial sense, according to the Forbes website. Paying out of a Roth account, on the other hand, does not. When you put money into a Roth, you pay tax on it, so if you pay Roth fees from the account funds, you're still paying with after-tax dollars. You're using up some of your retirement assets and not really getting a big tax break on the deal.

    If you use IRA funds to pay the fees, you don't get to take a write-off for the same expenses. If your custodian also manages other accounts for you, Forbes notes that you should be sure he only takes IRA-custodial fees from the IRA and gets the other fees elsewhere. If you take money from an IRA to pay other fees, that's a taxable withdrawal. If you're under 59 1/2, it also comes with a 10 percent early-withdrawal penalty.

    About the Author

    Fraser Sherman is a former reporter with the "Destin Log" newspaper and now freelances full-time. His work has been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life," and he's the author of three film reference books, including "Screen Enemies of the American Way." He specializes in finance and tech articles.

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