The tax laws allow investors to take a deduction for fees paid for advisory services to handle your investments. How advisory fees get handled in your account, however, plays a major role in exactly how you'll need to account for those charges. For Roth IRAs, it's important to take specific steps, if available, in order to preserve the potential for a tax deduction.
Investing fees for various accounts
How fees get handled depends on several variables. In taxable accounts, some common fees, including management fees associated with a mutual fund, directly offset the income that the investment produces. As a result, investors effectively get a deduction for these costs because they're taken directly from the income that the mutual fund produces and distributes to its shareholders.
For other fees that aren't directly taken from a fund account, investors in taxable accounts have to take miscellaneous itemized deductions that are subject to the 2% floor. This means that you can only deduct those miscellaneous expenses that exceed 2% of your adjusted gross income.
Dealing with retirement accounts
The IRS allows investors to handle fees in IRAs in one of two ways. The simplest is to pay the fees directly from IRA funds. This has the benefit of being easy to do, and with traditional IRAs, it also uses pre-tax money that would otherwise be taxable when you withdraw it during retirement. However, Roth IRAs have the disadvantage of using what would ordinarily be tax-free money even after you take it out of the Roth IRA.
The second option is to make payments for IRA-related advisory fees with money from outside the IRA. When done this way, you have the option of claiming a miscellaneous itemized deduction for the payment, even though it's going toward a retirement account. For a Roth IRA, this essentially allows you to preserve the full value of your tax-free Roth at the expense of using money from outside the retirement account, and it preserves a potential tax benefit for your trouble if your total expenses exceed the 2% floor for miscellaneous itemized deductions.
The biggest challenge in many cases is arranging to have fees paid from outside sources. To do so, you often need to know the schedule that your investment provider uses for deducting expenses. Follow it very closely, because most investors go the simple route of having fees withheld directly from their accounts.
Advisory fees for Roth IRAs can add up, especially if you have a lot of savings. Taking the trouble to figure out how to maximize your tax benefit for advisory fees can be worth it if it boosts the eventual value of your retirement nest egg.
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