Plus, the client has no way to know the magnitude of the risks their principal is being exposed to. If they don't know the net return, it's a sure bet that they haven't done any risk analysis. They will think about risk only when they see half or more of their original principal, plus all those fancy earnings, get flushed down the toilet by a market reversal. And then they come asking about getting a tax deduction for their "losses". At that point they begin to understand the concept of pre-tax investing but can never get the hang of "no tax basis" in their qualified plan.
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"The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith -
In the case I referred to above, the fees were management fees, assessed quarterly and were based on a percentage of the total gross $$$ in the IRA/SEP account. They were paid separately from a taxable account for a while, and therefore deductible as they exceeded the 2% floor. I see this all the time with investment managers and clients, and they amount to several thousand dollars as a rule. The "management" is always trading in and out of mutual funds, and is not based on trading frequency. It is my opinion that the same results can be achieved with 15 funds, rather than 35, as many are sector-duplicated. Most investors have no clue -- one told me they checked the statements each quarter, and if the total was more than the last, they threw them away.Comment
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Well, of course 15 funds would be better than 35, but with 15 the client might actually be able to figure out something about the statements. Get it up to well over 25 and their eyes will start to glaze over. Keep 'em confused and they won't be asking those pesky questions. Mission accomplished."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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Deducting might be a problem
Burke -Originally posted by Burke View Post
I am aware of these types of asset-based fees. Several of my clients have them, and one client pays >$10k/year in such fees. In the simplest of terms, the client does not "pay" a trade commission but instead pays this quarterly fee, which varies based upon the equity in the account. All of my clients with such fees have taxable (non-IRA) accounts, so the specific issue being discussed here never has become an issue. FWIW: The client mentioned also has a (modest) IRA account with the same national brokerage firm, and all trades within that account are of the usual "per trade" cost. Whether that is the client's choice, or the firm's rules, I do not know.
It would concern me a bit as to whether similar fees could be "deducted" when an IRA account is involved. For all intents and purposes, the "fees" are in lieu of a per trade commission, which we ALL agree would not be deductible in any way. To deduct all (even some?) of such fees as "management expenses" would seem to be a very slippery slope. If I had to make an educated quess, it would be you could NOT deduct such IRA fees on a Schedule A as a miscellaneous investment item.
Hopefully someone can clarify this issue for us.
FEComment
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Commissions are commissions.
And management fees are management fees. And ne'er the twain shall meet. See my earlier post. If this were not a retirement account, commissions would obviously be capitalized, while management fees would be deductible to the extent they were not for the production of tax-exempt income.Evan Appelman, EAComment
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While I agree with the point that management fees are not deductible for tax-free accounts (I have a client whose substantial investments are pretty evenly divided between taxable stocks/mut funds and tax-free bonds so we take approx 1/2 the fees each year on Sche A). However, IRA's and SEP accounts, like annuities, are not tax-free but tax-deferred, as they are taxable upon withdrawal. So, is the general consensus that these fees may only be deducted on a return which has taxable withdrawals?Comment
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Further ponderisms
I have made an inquiry to an investment person who normally provides me reliable information.Originally posted by Burke View Post
As to your question, at the present time I'm pretty much of the opinion that the asset-based fees for an IRA account are a non-issue, regardless of whether there are any taxable withdrawals from said IRA account. (Read Pub 529 - it makes reference to deducting "trustee's administrative fees" which are ordinary and necessary.) Also, it makes zero sense to deduct (if you could) annual expenses only when a withdrawal has occurred.
And what would happen if our old friend Form 8606 also came into play?
FEComment
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Sorry I brought it up.
I was trying to be thorough, but my remark about non-taxable income is irrelevant to a traditional IRA, in which ALL income is taxable. If we are quoting Pub. 529, the critical sentence is:
"You can deduct investment fees, custodial fees, trust administration fees, and other expenses you paid for managing your investments that produce taxable income."
If you pay out-of-pocket for someone to manage the investments in your IRA, that is a Schedule A deduction.Evan Appelman, EAComment
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IRA fees, I thought
Originally posted by appelman View Post
Actually, this is what I was specifically referencing (from page 11 of Pub 529):
Trustee's Administrative Fees for IRA
Trustee's administrative fees that are billed separately and paid by you in connection with your IRA are deductible (if they are ordinary and necessary) as a miscellaneous itemized deduction subject to the 2% limit.
I thought the original post by Sandy was regarding only *IRA* fees, and not general investment fees etc.
FEComment
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Excuse me for nitpicking.
But I think she/he referred to account management fees:
"Sched C T/p who has SEP IRA - paid account mgmt fees outside of the Account, check or Credit Card - significant fees (not the small $20-$50 fees)"Evan Appelman, EAComment
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As is often the case I find myself in disagreement with the majority view. I posted earlier about the wisdom, or lack thereof, of paying IRA trustee/administrative fees with personal, i.e. non-IRA funds. Now I wish to address the matter of the deductibility of a broker's management fees paid for an IRA.
The fees in question, and the ones giving rise to the original post in this thread, are not IRA trustee or administrative fees at all. Rather, they are the fees charged on a "managed account" offered by most of the larger brokerage "houses." The fees are typically 3% annually of the account's FMV ... charged quarterly (i.e. .75% per quarter) ... for which the account gets unlimited trades, without separately stated commissions, plus professional management. I offer this description for the benefit of any readers who may not be familiar with this kind of brokerage account. They have been around for at least twenty years.
I wish to make it clear that I am not sure if such fees are deductible when paid by the owner of an IRA outside the IRA using his own funds. The consensus above is that they are deductible, as a "miscellaneous deduction" on Schedule A (and subject to the 2% N/D floor), but I have my doubts.
The above posts eventually led to the general agreement that such fees are paid in connection with the production of taxable, instead of tax-exempt income, so are therefore deductible. While it is true that IRAs do, generally, produce income that will eventually be taxed, it is equally true that IRA do not produce currently taxable income, except the the limited extent there are distributions from the IRA. And what about Roth IRAs or the portion of non-deductible, traditional IRAs? These do produce tax-exempt income, and even though the OP did not address this point, it is still a valid one to consider. But traditional IRAs themselves do produce tax-deferred income, and although this is not the same as tax-exempt income, it isn't taxable income either ... at least not yet.
On pages 8 and 11 in Pub 590 the IRS does have this interesting comment" "Brokers’ commissions paid in connection with your traditional IRA are subject to the contribution limit." Although the fees in question are not explicitly called commissions, they are tantamount to commissions. They are charged as a percentage of the account's value, and they are charged in lieu of separately stated commissions on each trade. I therefore believe it is entirely possible that the IRS may disallow the deduction for such fees upon audit. If if this happens, those fees are lost forever as a tax deduction.
This is a risk I would advise any client to avoid by arranging to have all such fees paid "inside" the IRA. That way there is sure to be a tax benefit ... eventually.Roland Slugg
"I do what I can."Comment
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Rather than engage in a battle of opinions...
I'll just pass along the following, from a J. K. Lasser Daily Tax Tip (Quotation marks included by author, but I don't know what it is being quoted from.):
"Fees paid to set up or manage an IRA, and annual account maintenance fees, are not considered IRA contributions provided they are separately billed. They are investment expenses that may be deducted as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor. However, broker's commissions that are paid when you make investments for your IRA are not separately deductible, according to the IRS. They are considered IRA contributions subject to the $5,000 contribution limit ($6,000 if age 50 or older) for 2011."
And also the following three links:
And with that, I believe I shall rest my case.Evan Appelman, EAComment
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