The IRS collects taxes based on net income, or the amount of money left after subtracting expenses related to that income. In taxable investment accounts this is straightforward -- simply subtract fees from your taxable gain. However, this method doesn't work for Roth individual retirement accounts (IRAs) because you aren't taxed on your gains. You may still get a deduction for Roth IRA advisory fees if the fees are bundled and paid from an outside source.
Roth IRA advisory fees come in wrap fees and transaction fees. Wrap fees charge a flat rate per period or a percentage of your market value. These fees are separate from transactions, and can be billed separately. Transaction fees are per-trade fees, sometimes called commissions. These fees are part of the cost of each trade, and can be bundled with SEC trade fees.
There are two ways you can pay Roth IRA fees with funds in the account, or with a separate payment. In most cases, transaction-based fees are commissions, and they must be paid with IRA funds. Wrap fees qualify as account maintenance, and can be paid from outside the account. If your fee agreement allows you to pay fees from outside the account, as most advisory-type arrangements do, you are eligible for a tax deduction.
Roth IRA advisory fees are itemized miscellaneous deductions. This means they can be grouped together with advisory fees for other taxable investment accounts and other investment-related expenses. This is a good thing, too, because you can only deduct the portion of the expenses that exceeds 2 percent of your adjusted gross income. So even if you have qualified expenses, you may not have enough to get a deduction.
If you don't qualify to take a deduction for your Roth IRA fees, you still get a tax break if pay them from inside the account. Everything you earn outside the Roth account is taxed, but the money earned inside the account is not. This means that if your fees are paid from account earnings, you are essentially giving yourself a discount, since you won't pay regular tax on that income.
Nola Moore is a writer and editor based in Los Angeles, Calif. She has more than 20 years of experience working in and writing about finance and small business. She has a Bachelor of Science in retail merchandising. Her clients include The Motley Fool, Proctor and Gamble and NYSE Euronext.