An individual retirement account is a smart way to save for your post-employment years. The traditional IRA allows you to deduct contributions from your income taxes; you don't pay taxes on any earnings in the account until you withdraw the money, when your (in theory) reduced income level will mean a lower tax rate. Management fees that you pay to someone to handle the account might also be deductible -- it depends on how you pay them.
Investment Expense Deduction
The IRS allows you to deduct expenses associated with a capital investment, such as a brokerage account in which you buy and sell stocks, bonds and mutual funds. If the broker charges a commission on a trade, the commission is added to your cost basis, and it's subtracted from sale proceeds when calculating the capital gain or loss. If you are charged a general management fee for handling the account, that expense is also deductible. In most investment accounts, including IRAs, the manager charges a percentage of the account size, typically 1 percent or 1.5 percent of the assets under management.
The IRS considers investment management fees to be miscellaneous itemized deductions, in the same family as tax-preparation fees and unreimbursed employee expenses. These deductions are subject to the 2 percent rule: You add up all such expenses, and you can deduct only any amount that exceeds 2 percent of your adjusted gross income. You list itemized deductions on Schedule A and carry them over to your 1040; you may not take a standard deduction and deduct management fees as well.
Method of Payment
However, before turning to Schedule A you must take into account how you pay the IRA management fee. If the money simply comes out of any cash balance you have 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 money. But if the manager or trustee bills you separately and allows you to pay from another source, then the fee is deductible for the year in which you paid it. Brokerage commissions charged to the IRA are not deductible; they are figured into the account's capital gains or losses.
Fees and Losses
If your IRA suffers a loss of capital, you may not deduct this loss until you've withdrawn the entire account balance, and the amount of money you've received is less than the basis -- the money that you contributed to the IRA over the years. The fees charged to the account over the years by the manager are a part of this calculation. However, instead of a capital loss, this is considered a miscellaneous itemized deduction and goes on Schedule A. In a Roth IRA, there are no taxes due on account gains when you withdraw, but you can deduct losses in the account.
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