Deductions for Investment Fees? Well, It Depends…

Though the new tax law, on balance, affords most taxpayers the benefit of less taxes owed for 2018, one of its provisions has been lamented by many: the loss of deductibility for investment fees. It’s really too bad, because typically fee-only financial advisory firms—like ours—are also fiduciaries, which means that we are professionally bound to offer advice that places our clients’ interests first. In other words, we can’t recommend a particular investment or course of action on the basis of what it pays us or for any other reason other than that it is the best course of action for our client.

Previously, such investment advisory fees were tax-deductible for most taxpayers. But with the passage of the 2018 tax law, such fees, along with most other itemized deductions, are no longer available to reduce taxable income.

However, there is still one circumstance where investment fees can provide a benefit to taxpayers. Owners of traditional IRA accounts can still pay any applicable fees from the IRA account and, in effect, receive a deduction from taxable income. Suppose that a traditional IRA account has generated capital gains and dividend income of $30,000 during the year. Most investment fees are calculated on the amount of assets under management, and the percentage is usually between 1.0 and 1.5 percent, depending on the size of the account and the type of assets it contains. Let’s suppose that our traditional IRA account is worth $500,000, and that the annual advisory fee is 1.5%, or $7,500. If the account holder elects to have the account pay its own fees, $7,500 would be deducted from the account, and the taxpayer would have a taxable gain of $22,500, rather than $30,000: in effect, a deduction.

This technique is especially useful for those taking required minimum distributions (RMDs) from their traditional IRAs. By allowing the account to pay its own investment fees, they are reducing the amount of income on which they must pay taxes.

Note that this only applies to traditional IRA accounts, which are funded with pre-tax dollars. Paying fees from Roth IRAs, which contain after-tax dollars, would not produce a reduction in taxable income, since the assets in such accounts have already been taxed. An additional caution applies to paying fees for non–tax advantaged accounts from an IRA; this is considered a prohibited transaction by the IRS and would result in the payment being treated as a taxable distribution, at best, or at worst, in the mandatory termination and distribution of the entire IRA account, making the full balance taxable as income during the year it is received.

If you have questions about investment fees and their deductibility, your IRA accounts, or other financial matters, an accredited, licensed financial advisor can help you find the answers you need.

Stay Diversified, Stay YOUR Course!

Empyrion Wealth Management (“Empyrion”) is an investment advisor registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. Information pertaining to Empyrion’s advisory operations, services and fees is set forth in Empyrion’s current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Empyrion. The information contained in any third-party resource cited herein is not owned or controlled by Empyrion, and Empyrion does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Empyrion of the third party or any of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner or investment advisor.

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