If you itemize your tax deductions, the fees you pay to financial advisers and tax advisers may be 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 (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.
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 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.
Small-Business Retirement Plan Credit
Small businesses receive a tax credit to apply toward the cost of establishing a new workplace retirement plan. As of the 2017 tax year, 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, you may deduct these fees as a miscellaneous itemized deduction, as 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 (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, which for 2017 stands at $6,350 per year for single taxpayers and $12,700 for married taxpayers filing joint returns. If your expenses are lower than this figure, you may want to consider taking the standard deduction instead.
- Internal Revenue Service: Form 8881 - Credit for Small Business Pension Plan Start-Up Costs
- Internal Revenue Service: Publication 529 - Miscellaneous Itemized Deductions
- TaxResourceGroup.com: Deductions & Credits; Individuals, Compensation & Employee Benefits; April 1998
- Internal Revenue Service: News Room, IR-2016-139, Oct. 25, 2016