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Deducting IRA management fees
Dear Tax Talk:
I am retired and have opened a regular IRA with a large, national
financial firm. They charge me a 1.5 percent annual fee for managing
the money. Are the managing fees for this IRA tax deductible?
Nick
Dear Nick:
I've been wondering the same thing for some time, so that's why
I chose your question. Years ago we all had traditional brokerage
accounts, whether in an individual retirement account or a regular
investment account. Together with the broker, we picked various
stocks on which we paid broker's commissions when we bought and
sold them.
Now all the rage is having a professionally managed
portfolio on which little or no broker's commissions are paid. Instead,
you pay a management fee of between 1 percent and 2 percent of the
value of the portfolio regardless of the trading activity. It is
clear that management fees on non-IRA accounts are deductible as
miscellaneous itemized deductions, since they are considered investment
expenses for the production of income.
Many years ago, the IRS ruled that IRA custodial fees
are deductible if paid with non-IRA funds (i.e., the custodian bills
you for the fee and you pay for it with a personal check). The fee
was generally around $50 a year, so the deduction was hardly worth
the effort.
Now let's say that you have $100,000 in the IRA; the
fee would be $1,500 a year. That deduction is a little more exciting
considering one way or another it comes out of your assets. That
is, the fee will either reduce your IRA or personal funds.
While I couldn't find specific authority that says
the fee is deductible in the case of an IRA, I found something similar.
The IRS issued a private letter ruling (an official decision requested
by a taxpayer on a specific issue) that if the investment fees were
separately billed and paid with non-pension plan funds, the amount
of the fees could be deductible by a business that maintained a
pension plan. While the letter ruling is specific to the person
requesting the advice and in addition deals with an employer plan,
there is no reason to believe that the IRS would hold differently
in the case of an individual's IRA.
The key to securing the deduction is getting the large
national financial firm that manages your IRA to bill you separately
for the fees and pay them with personal funds. The amount you pay
would be a miscellaneous itemized deduction, not an IRA contribution
deduction.
-- Posted: May 21, 2002
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