Advisory Fees – Charge Pre-Tax or After-Tax
We have the ability to charge a single account for our total AUM advisory fee. We understand that a fee charged to an IRA for a non-retirement account, COULD be viewed as a distribution in the eyes of the IRS – but they are coded as advisory fees at our custodian.
Should an IRA be charged for the household fees or charge a taxable account and allow that fee amount to continue tax-deferred? With the changes on deductibility of advisory/investment fees, this is a little more of a question.
Permalink Submitted by Alan - IRA critic on Mon, 2021-02-01 15:41
Billing a TIRA for fees that should be allocated to taxable accounts (or to a Roth IRA) could result in a prohibited transaction, meaning a distribution of the entire TIRA, not just the improperly allocated fees. The following article describes the entire range of account fee allocation that are legal and also one that is highly aggressive. Generally speaking, for most clients that preferred order would be 1) Fees allocated to TIRA pulled from any TIRA account. 2) Fees allocated to Roth IRAs or taxable accounts billed to the taxable account. Of course, the taxable account fees can no longer be deducted as a misc deduction due to the TCJA, and the Roth fees are considered to be for the generation of tax free income, so were never deductible (like fees allocated to muni bond assets) even prior to the TCJA . Article below:
Maximizing Pre-Tax Investment Advisory Fees After TCJA (kitces.com)
Permalink Submitted by brcwm on Fri, 2021-02-05 03:28
Roughly the same question, if a client is in 22% bracket. Should the client pay IRA advisory fees out of an IRA or should they pay the IRA fees out of a taxable account? Beneficiaies will inheirt pre-tax, Roth, and non-qual funds. RMDs are the only amounts being paid out of IRA.
Permalink Submitted by Alan - IRA critic on Fri, 2021-02-05 04:25
Best to have the fees deducted from the TIRA, but only fees properly allocated to the TIRA balance can be pulled from the TIRA. The remaining fees should come from the taxable account.
Permalink Submitted by Mobey on Mon, 2021-02-08 17:30
Keep in mind, fees deducted from a TIRA are not taxable to the client so it’s as if they are paying a bill out of the IRA without recognizing it as income.
Permalink Submitted by Alan - IRA critic on Mon, 2021-02-08 17:39
Correct. Direct deduction was beneficial even when prior to the TCJA the taxpayer could deduct the fees as a misc deduction (subject to 2% AGI floor). Now that this deduction is suspended pulling the fee directly from the TIRA is a no brainer if the IRA owner is older and has a sizeable TIRA balance. This advantage may phase out to the degree the IRA owner is younger, has a small IRA balance and a larger fee.
Permalink Submitted by Jeffery Acheson on Tue, 2021-03-02 01:46
Assume I have an TIRA at one institution, another TIRA at another insttitution and a 401(k) self-directed brokerage account window at work. Can the investment advisory fees applicable to all be pulled from one TIRA or will that still invoke a Prohibiited Transaction risk?
Permalink Submitted by Alan - IRA critic on Tue, 2021-03-02 02:35
The IRA fees can be pulled from one IRA, but the 401k fees cannot, even if the advisor serviced all the accounts. While the net tax effect would be the same, pulling a 401k fee from other than the 401k would either be a prohibited transaction or a taxable distribution from the IRA should the IRS get wind of it. In addition, if the 401k has both pre tax and designated Roth balances, the portion of the 401k fee attributed to the Roth would have to be pulled from the Roth 401k sub account.
Permalink Submitted by Jeffery Acheson on Tue, 2021-03-02 02:43
Alan, thank you for your quick response!! I suspected that was the answer but couldn’t find that explicitly spelled-out in the tax code anywere to be able to both validate and document my response to the client. Would you be able to point me to the IRC section that spells this out? I read 4975 about Prohibitied Transactions but again, it wasn’t explicit.
Permalink Submitted by brcwm on Thu, 2023-07-27 22:16
I’m still trying to find information about advisory fee attributed to 401k assets paid by an IRA. Is this allowed? If not, can you cite where I can find it is possibly a prohibited transaction?
Permalink Submitted by Jeffery Acheson on Thu, 2021-03-04 13:31
Anybody have input here?
Permalink Submitted by Alan - IRA critic on Thu, 2021-03-04 14:23
There are several code sections that address a portion of the topic, and some Treasury Regs. The following article aims to tie these together with a goal of tax management of the fee payments after the TCJA suspended misc deductions subject to the 2% AGI floor. Following is the article:
Maximizing Pre-Tax Investment Advisory Fees After TCJA (kitces.com)
Permalink Submitted by Jeffery Acheson on Thu, 2021-03-04 16:40
I am very familiar with the article and have granually digested it but unforturantely it doesn’t explicitly answer my specific question. I am a member of Kitces. com and have pinged the author but he isn’t as responsive as you. 🙂
Permalink Submitted by Tracy Hawbaker on Mon, 2022-10-10 17:56
Can and should Beneficiary Roth IRA fees be taken from an IRA? The client doesn’t have a taxable account with us.
Permalink Submitted by Alan - IRA critic on Mon, 2022-10-10 18:54
Roth fees can only be deducted from a Roth account or paid with taxable funds. With no taxable accounts under management the client could be billed and pay the fee with a checking account check or CC, but otherwise the deduction would have to come from a Roth account, better an inherited Roth than an owned Roth IRA.
Permalink Submitted by brcwm on Thu, 2023-07-27 22:40
I’m still trying to find information about advisory fee attributed to 401k assets paid by an IRA. Is this allowed? If not, can you cite where I can find it is possibly a prohibited transaction?
Permalink Submitted by Alan - IRA critic on Fri, 2023-07-28 00:45
The Kitces blog has been addressing advisory fee payments for over a decade, but has never opined on the deducting qualified plan “assets under advisement” fees being drawn from an IRA. Since these plans are addressed in an entirely different portion of the tax code from IRAs, and since a large portion of these plans either contain a Roth sub account or shortly will due to the Secure 2.0 catchup Roth mandate, it would be best to avoid the risks of such a fee deduction from an IRA.