Can You Claim IRA Advisory Fees on Income Taxes?
Investment advisory fees related to your IRA can have a significant impact on your investment performance and the overall value of the account. It makes sense to attempt to offset some of this expense by reducing your tax bill, deducting these fees from your taxable income. The deductibility of these expenses depends on how the trustee or financial advisors handle the invoicing and payment of the fees, and if they are paid from IRA funds or not.
The IRS has ruled in a private letter ruling that a company can deduct advisory fees separately billed and paid with non-pension fund assets. No reason exists to believe that the IRS would not apply the same ruling to an IRA owned by an individual, allowing deductibility of the same fees. To help ensure deductibility, make sure that anyone providing investment advice bills for this advice on a separate invoice, and you pay for it with your own personal funds outside of IRA funds or yearly contributions.
The custodian fees that an IRA trustee charges for basic paperwork and maintenance of the account are deductible on your income taxes. These fees typically are less than $50 per year. Again, these fees should be paid with non-IRA funds to ensure deductibility. Custodian fees are also not considered part of the total IRA contribution for the year.
Impact on Maximum Contributions
By paying IRA advisory with your own funds, not part of the IRA account, these fees do not have an effect on your yearly maximum contributions. If you contribute the maximum for a person under age 50 ($5,500 as of 2013), and the trustee deducts $500 from the account for advisory or custodian fees, you cannot increase your contribution to compensate for that amount. By paying the fees separately, your maximum contribution is fully invested in the account.
Deductions and Mandatory Withdrawals
At age 70 1/2 with a traditional IRA, or with an inherited IRA, you are required to take withdrawals of a certain percentage each year based on your life expectancy. With a traditional IRA, these withdrawals are taxable at your regular income tax rate. If your IRA was assessed a fee for investment advice or management, and it was paid with IRA assets, you cannot deduct a percentage of this fee proportionate to your withdrawal. For example, if your trustee deducts $1,500 from your IRA for fees, and you must withdraw 5 percent of your IRA balance for the year, you cannot deduct 5 percent of the $1,500 fee.
You claim any deductions for investment advisory fees on your Schedule A as an itemized deduction, specifically as a miscellaneous itemized deduction. All of your miscellaneous itemized deductions, which include unreimbursed employee business expenses and job search expenses, are only deductible to the extent that they exceed 2 percent of your adjusted gross income. For example, if you have $60,000 in adjusted gross income, and $2,000 in miscellaneous itemized deductions, 2 percent of your adjusted gross income is $1,200, and you can deduct $800, the amount that exceeds 2 percent.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.