If you itemize your tax deductions, your investment advisory fees may be tax deductible as either an individual deduction or as a business expense. Whether you can take such a deduction (and how you do it) for an individual retirement account, or IRA, will depend upon the type of IRA and the nature of the fee. The rule of thumb is that for these types of fees to be deductible, they must be related to investment activity that produces taxable income. IRAs do not, in general, qualify.
Generally speaking, you can deduct a variety of fees associated with IRA accounts, although the specific details of this process and eligibility requirements may vary depending upon the IRA in question.
Types of IRAs
There are four basic types of IRAs. The first two, traditional IRAs and Roth IRAs, are individual plans. These plans aren't carried on a business income tax return, but on a personal income tax return. Contributions to traditional IRAs are made pre-tax, which means you can contribute your income to the IRA before the taxes are deducted, but the taxes are paid when distributions are made. Roth IRAs, on the other hand, involve post-tax contributions, so that they produce tax-free income when distributions begin.
The second group, consisting of SIMPLE IRAs and SEP-IRAs, are small-business retirement plans. Fees associated with this group are business expenses rather than personal income tax items. Each of the four types of IRAs are free of federal income and capital gains tax as long as the money remains in the IRA.
Types of Fees Associated IRAs: What Can You Deduct?
You cannot deduct expense ratios within mutual funds in your IRAs. You cannot generally deduct brokerage expenses that you incur in connection with your IRA or other investment property. The IRS considers these fees to be an expense of the IRA itself rather than the owner. You may be able to deduct IRA custodial fees under certain conditions. You can deduct fees and expenses you pay to administer accounts that produce taxable income, but this means the fees paid to administer a Roth IRA are not deductible, for example, as Roth IRA contributions are made post-tax.
Tax Preparation Fees
You can normally deduct tax-preparation fees on your personal and business tax returns. If you had an additional reporting requirement because of a rollover to a Roth IRA, for example, or because of a taxable distribution from a traditional IRA, you can deduct the cost of filing the additional paperwork with the IRS. However, with new tax reforms, taxpayers are no longer able to deduct or write off tax preparation fees, beginning with the 2018 tax year.
Small-Business Retirement Plan Credit
Small businesses receive a tax credit to apply toward the cost of establishing a new workplace retirement plan. For the 2017 and 2018 tax years, the tax credit is worth up to $500, or half the cost of establishing a new plan, whichever is lower. To claim the credit, file IRS Form 8881, Credit for Small Employer Pension Plan Startup Costs.
Expenses Paid from Outside the IRA
Some custodial firms structure their payment plans so that fees are paid from outside the traditional or Roth IRA, rather than by the IRA itself. In these cases, the custodial fees are tax deductible as a miscellaneous itemized deduction, like you would any other non-IRA related investment expense.
Points To Consider Before Deducting Investment Fees
If you do deduct investment fees on your individual income tax return, you must itemize your deductions. These deductions are only good to the extent they exceed 2 percent of your adjusted gross income, or AGI. Additionally, itemizing deductions may not be the best idea if the total amount of your deductions in excess of 2 percent of your AGI is less than the standard deduction. If your expenses are lower than this figure, you may want to consider taking the standard deduction instead. It is also worth noting that recent changes in tax law have phased-out certain itemized deductions for the 2018 tax year and beyond. Familiarize yourself with these changes on the IRS' website, or speak with a qualified tax professional so you know that you remain in compliance come tax time.
Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.