The benefits of investing in an individual retirement account are legion, but those perks may not come cheap. All IRA accounts are custodial or trust accounts, and your custodian might charge a fee for its services, particularly if it acts in an advisory role. IRA advisory fees could be tax-deductible, but it depends on how you pay those fees.
Commissions, trading costs and advisory fees that occur inside your IRA, or are paid with money from your IRA, aren't tax-deductible. For example, if you have $250,000 in your IRA and your investment adviser charges a fee equal to 2 percent of your account balance, your fee for the year would be $5,000 ($250,000 multiplied by 0.02). If you pay the bill with funds inside your IRA, get ready for a double whammy. You don't get a tax deduction and you reduce the balance in your IRA.
You can write off your IRA advisory fees as long as they are billed separately and the payment doesn't come out of your IRA. Some investment advisory services charge a wrap fee, which includes charges for trading costs, account maintenance and other financial services in addition to the costs for their advice. As long as these fees are billed and paid outside of the IRA, you can deduct them, too.
Paying your IRA advisory fees with outside money provides a nifty benefit if you have a Roth IRA. Even though you can't deduct Roth contributions, you can deduction those advisory fees. Since you paid them outside your Roth, you preserve the balance in your account so you have more money available for tax-free growth. Advisory fees paid separately aren't included in your maximum IRA contributions, so it's almost like getting a bump to the amount you can contribute.
If you want to claim a write-off for your IRA investment advisory expenses, you'll have to itemize your deductions. The Internal Revenue Service considers such fees part of your miscellaneous deductions, which are limited by the so-called "2 percent rule." You can only deduct the amount of your total miscellaneous deductions that exceeds 2 percent of your adjusted gross income. It pays to figure your taxes both ways. If you don't have sufficient itemized deductions, you may be better off claiming the standard deduction.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.