Are Administrative Fees for Retirement Plans Tax Deductible?
Your 401(k) or IRA already offers you a good tax deal in saving for retirement. If you can take extra deductions, for the cost sof managing your account, so much the better. It's sometimes possible to take a write-off for the fees, but it's often not the best tax move.
You can write off investment-management fees whether or not they involve your retirement plans. The bad news is that you have to itemize deductions on Schedule A to claim the fees. The worse news is that investment fees are in the category of "2 percent deductions," along with such things as unreimbursed employee expenses. To qualify, you add all category deductions together, then subtract 2 percent of your adjusted gross income. Whatever remains is what you write off.
When you're paying fees for a traditional IRA or 401(k), you have the option to have the account trustee take the money directly out of your account. Your account consists of pre-tax dollars, so "Forbes" argues it works out cheaper than paying after-tax dollars out of your own pocket. If you use the account to pay its fees, you don't report the payment as a taxable withdrawal but you can't claim any tax write-off.
The drawback of taking money out of your account is that it reduces your retirement fund. With a traditional IRA, that can still work out better for you than paying with after-tax dollars, but it's different with a Roth. Everything in the account has already been taxed, but there's no tax when you withdraw money. Paying Roth fees from the Roth assets gets you no tax advantage but it still reduces your retirement savings.
If you do decide to take money out of a retirement account to pay fees, it has to be for that account. You can't withdraw money from, say, an underperforming IRA to pay fees for another IRA that's doing well. That would count as a taxable withdrawal. Making a withdrawal before you turn 59 1/2 requires you pay not only income tax on the money, but a 10 percent tax penalty as well.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.