surrender fees
A friend did a direct traditional IRA transfer to a different insurer. She was told by her CPA that surrender fees could be deducted on ScheduleA/miscellaneous. I told her to be cautious and get another 1 or 2 opinions. I can find no reference to this in IRS.gov.. I always thought this was an ‘expense’ that the policy holder would just ‘eat’ with no deduction possible. Scary. Is the CPA correct?
Thanks, MBD
Permalink Submitted by Peter Lingane on Sat, 2011-11-12 18:35
Fees paid from the IRA are deductible in the sense that the IRA is smaller and that eventual taxes will be less. However, fees paid from the IRA are not currently deductible on Schedule A.
I can understand that a particular insurance product would be so unsatisfactory that it would be worthwhile to pay a fee to transfer to another IRA. What I do not understand is how another insurance product could be more advantageous than a traditional IRA at a bank or brokerage firm.
Permalink Submitted by Alan Spross on Sat, 2011-11-12 21:05
Whether the annuity is an IRA annuity or a non qualified annuity, any surrender fees are not directly deductible as a misc deduction.
However, the surrender fees can indirectly lead to a deduction if all the IRA owners TIRAs (or all Roth IRAs) are liquidated for an amount less than the taxpayer’s basis. For a non qualified annuity this also applies on an individual annuity to annuity basis.
Example: Taxpayer contributed 25,000 over the years to his Roth IRAs and purchased an annuity in the Roth. Taxpayer needed the money and cashed in the IRA annuity when it was worth 21,000. A surrender fee of 1,000 was also incurred, so taxpayer received 20,000 and closed the one and only Roth. Taxpayer has a misc itemized deduction subject to 2% floor for 5,000. Note that the surrender fee was part of this deduction, but if the annuity was cashed in with a profit after the surrender fee, there would be no possible deduction at all. Therefore, the CPA may not have explained the deduction in sufficient detail including all the conditions required to actually benefit from it.
A misc deduction can be wiped out by the 2% floor, by AMT, or by having total itemized deductions of less than the standard deduction.