Your IRA custodian fees and management fees for a Self-Directed IRA may be tax-deductible.
What are IRA Custodian Fees?
If you have an IRA, you may see IRA custodial fees. Essentially, an IRA custodial fee is an administrative fee you pay to the IRA custodian. This fee keeps your retirement account open. However, such fees are less common among Self-Directed IRAs. Additionally, if you have a Self-Directed IRA, your custodial fees may be tax-deductible.
Are your Self-Directed IRA Custodial Fees Tax-Deductible?
Not many retirement account holders know this, but payment of IRA custodian fees are usually tax-deductible. Under Internal Revenue Service (IRS) rules, in place of the standard deduction, you can deduct certain expenses as “miscellaneous itemized deductions”. You can do this on Schedule A (form 1040 or Form 1040NR).
You can only claim the amount of expenses that is more than 2% your adjusted gross income. For example, Amy, a single taxpayer, has adjusted gross income of $50,000. She may deduct her miscellaneous itemized deductions only to the extent that they exceed 2% of $50,000, or $1,000.
Some of the more popular itemized deductions are:
- Gifts to charity
- Home mortgage interest
- Tax preparation fees
- Medical and dental expenses
If you use
Use Schedule A to itemize deductions in place of taking the standard deduction. That way, you may deduct IRA custodial fees and management fees taking into account the 2% threshold.
Management Fees for Your IRA
There are currently around 49 million individual retirement accounts. The majority of all IRA accounts are subject to small annual administration fees. Generally, these fees cover basic paperwork and maintenance of the account. These annual management fees may be tax deductible, subject to the itemized deduction rules. Also, the fees must be separately billed and paid for using IRA funds.
In other words, IRA management fees by personal cash or check that are not deducted from the IRA may be deducted as investment expenses, subject to the itemized deduction limits.
Custodial Fees for Your IRA
Additionally, IRA Custodian fees are not considered part of the total IRA contribution for the year. On the other hand, IRS rules further provide that if you pay IRA administrative/management expenses directly from the IRA, this payment will not be considered a distribution from the IRA.
For example, let’s assume you contribute the maximum for someone under age 50. In 2019, this is $6,000. Then, the trustee deducts $200 from the account for advisory or custodial fees. The fee you pay will not be seen as a distribution. Additionally, it will not increase the IRA contribution to compensate for that amount.
Therefore, a retirement account owner has two choices:
- Pay IRA management/custodian fees with the money in a retirement account (this is subtracted directly from the account without tax consequences).
- Pay the fee with outside/personal dollars, and claim the itemized deduction.
Investment Management Fees
The same predicament falls on a retirement account holder subject to investment management fees with their IRA. The IRS in a private letter ruling affirmed that “wrap fee”-style arrangements, such as ongoing asset under management and investment advisory fees can be paid with outside taxable dollars and still be deducted as Section 212 expenses, subject to the itemized deduction limits.
The determination of whether the IRA administration/management fee is deductible is dependent on how it’s billed. For example, if the money simply comes out of any cash balance in the IRA, you cannot deduct it. Instead, for tax purposes the fee is offset against earnings in the account when you begin withdrawing the retirement account funds.
But the IRA administrator/trustee can bill or invoice the individual separately. This allows the individual to pay from another source. As a result, the fee may be deductible for the year in which it was paid, subject to the itemized deduction rules.
Prohibited Transaction Rules
The “prohibited transaction” rules under IRC Section 4975 holds that when a retirement account conducts a transaction between an account and a “disqualified person”, the transaction can be subject to tax and severe penalties. Therefore, it is critical that you not use retirement funds to pay for nonpersonal expenses or vice versa.
Retirement Account Funds vs Personal Funds
You can pay IRA custodian fees and similar investment advisory fees from retirement accounts. However, the fee must be attributable only to the retirement account. So, the question remains if you should use your retirement account when possible or use personal funds.
The answer is generally dependent on a variety of factors. Specifically, it depends on how much of the IRA will be deductible if it was paid with outside/personal dollars instead, according to the itemized deduction rules.
After all, the primary benefit to paying the IRA custodian fees and management fees from a retirement account is the ability to pay it with pre-tax dollars. By definition, the retirement account is pre-tax. However, if the fee can be fully deductible with personal/outside dollars taking into account the itemized deduction rules, then it’s best to simply pay with outside dollars. This allows the IRA to maximize its ongoing tax-deferred growth.
Use Personal Funds
In reality, IRA custodial fees and management fees are often not fully deductible due to the 2%-of-AGI floor on miscellaneous itemized deductions. This is also due to the reach of the alternative minimum tax (“AMT”).
Still, it’s almost always be preferable to use personal funds to pay the IRA custodian fee/investment management fee for a Roth IRA. Even if the fee is not deductible, there is the belief is that it is always better to pay with after-tax dollars from a taxable account than using future-tax-free-growth dollars from the Roth IRA itself.
The ability to deduct IRA custodian fees can be a nice tax benefit to many IRA account holders itemizing their tax deductions. Nevertheless, IRA holders should consult with a tax professional in order to better navigate the rules and maximize any potential tax benefits.
Get in Touch
Do you still have questions about IRA custodial fees and management fees with a Self-Directed IRA that we didn’t answer in this article? Please contact IRA Financial Group at 800-472-0646. You can also fill out the form to get in touch with an on-site IRA specialist.