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Tax Talk with George Saenz

Ask the tax adviser

Deducting IRA management fees

Dear Tax Talk:
I am retired and have opened a regular IRA with a large, national financial firm. They charge me a 1.5 percent annual fee for managing the money. Are the managing fees for this IRA tax deductible?
Nick

Dear Nick:
I've been wondering the same thing for some time, so that's why I chose your question. Years ago we all had traditional brokerage accounts, whether in an individual retirement account or a regular investment account. Together with the broker, we picked various stocks on which we paid broker's commissions when we bought and sold them.

Now all the rage is having a professionally managed portfolio on which little or no broker's commissions are paid. Instead, you pay a management fee of between 1 percent and 2 percent of the value of the portfolio regardless of the trading activity. It is clear that management fees on non-IRA accounts are deductible as miscellaneous itemized deductions, since they are considered investment expenses for the production of income.

Many years ago, the IRS ruled that IRA custodial fees are deductible if paid with non-IRA funds (i.e., the custodian bills you for the fee and you pay for it with a personal check). The fee was generally around $50 a year, so the deduction was hardly worth the effort.

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Now let's say that you have $100,000 in the IRA; the fee would be $1,500 a year. That deduction is a little more exciting considering one way or another it comes out of your assets. That is, the fee will either reduce your IRA or personal funds.

While I couldn't find specific authority that says the fee is deductible in the case of an IRA, I found something similar. The IRS issued a private letter ruling (an official decision requested by a taxpayer on a specific issue) that if the investment fees were separately billed and paid with non-pension plan funds, the amount of the fees could be deductible by a business that maintained a pension plan. While the letter ruling is specific to the person requesting the advice and in addition deals with an employer plan, there is no reason to believe that the IRS would hold differently in the case of an individual's IRA.

The key to securing the deduction is getting the large national financial firm that manages your IRA to bill you separately for the fees and pay them with personal funds. The amount you pay would be a miscellaneous itemized deduction, not an IRA contribution deduction.

-- Posted: May 21, 2002

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Getting the most from itemized deductions

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