March 12, 2019
Tax Change and IRA Management Fees
By Paul Miloe, CRPS®

With 2018 tax filing season underway, the realities of the Tax Cuts and Jobs Act of 2017 (effective in 2018) are now being understood. The big change most taxpayers have noticed was the substantial increase to the standard deduction and the effects that has had on their ability to itemize deductions. In many cases, itemization has been eliminated, and simply going with the standard deduction has proven better.

In prior years, investment management fees were deductible when itemized on the return, and in conjunction with other related expenses (known as Section 212 expenses), the total exceeded 2% of Adjusted Gross Income. This particular deduction has been suspended under the Tax Cuts and Jobs Act of 2017. Prior to getting creative, be sure to understand the rules and pitfalls of non-compliance.

For investment management fees, account owners have had the ability to direct their advisor and/or account custodian to pull the fees by account or from any one account. Under the old tax law, there was often merit in having IRA management fees pulled from non-qualified (taxable) accounts or paying the IRA fees directly. When management fees were pulled directly from the IRA, they were not able to be itemized. When pulled from a taxable account, then they were able to be added to the total amount of fees when itemizing (and help taxpayers exceed the 2% threshold)….a potentially positive outcome.

Pulling the fees from the IRA can have its own merits. Although the ability to itemize is lost when pulled from the IRA, doing so avoids any taxation on those funds, and the amounts pulled for management fees are not reportable as a taxable distribution. Thus, there’s a “tax savings” (vs. deduction) on this approach that increases in value as your tax bracket goes up.

Currently, some might seek to get creative and try to have their non-IRA fees pulled from their IRA in order to get the “tax savings” noted above. While an IRA custodian may permit this, note that the IRS does not. Only fees attributed to the management of the IRA are able to be withdrawn without incurring income tax. If fees from another account are assessed from the IRA, they could be deemed a prohibited transaction and this could potentially disqualify the entire IRA.

Bottom line – only have IRA fees attributable to a particular IRA pulled from that IRA.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.