The TCJA’s Impact on Investment Management Fees for IRAs - A Global Tax Blog Article from KLR

Global Tax Blog

The TCJA’s Impact on Investment Management Fees for IRAs

posted Dec 12, 2018 by Paul Nadeau Jr., CPA, MST in the Global Tax Blog

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Attention investors….as you start planning for your 2018 taxes, you’ll want to make note of some major changes made by The Tax Cuts and Jobs Act (TCJA). For starters, the 2017 tax overhaul eliminated miscellaneous itemized deductions.  Prior to 2018, taxpayers could deduct investment and custodian fees to the extent the total for this category exceeded two percent of their Adjusted Gross Income.  Under the new law these deductions are lost.  However, there are ways to pay the fees related to your traditional IRAs in a tax efficient way.

Prior to the TCJA

Before 2018, conventional advice was to pay investment fees related to IRAs from taxable accounts so that you could get the deduction and the IRA funds would keep growing.   

Changes under the TCJA

The deduction is no longer available for investment fees, so it makes sense to re-examine how the IRA fees are being paid.

One option is to have the IRA pay its own investment fees.  The IRS allows a retirement plan to pay its own advisory fees without the cost being a deemed distribution from the account.

Traditional IRAs are pre-tax accounts meaning the earnings inside are tax deferred and will not be taxed until distributions are taken.  Therefore the payment of the advisory fee directly from the IRA is a pre-tax payment and will reduce taxable income and tax.

Example:

Dave has a traditional IRA worth $300,000 that must pay a 1% (or $3,000) advisory fee.  He can choose to make this payment with IRA funds or from an outside taxable account.  Under the new tax law, the payment from the taxable account will no longer be deductible.  If paid from the traditional IRA, the $300,000 account will be worth $297,000 thus reducing his future taxable income by $3,000 and tax by $900 (assuming a 30% tax rate in the future).  So in effect, the cost of the advisory fee was only $2,100.

Growth and Time Horizon

The IRA account’s growth and time horizon for distributions play a factor in determining what account to use for the IRA fees.  The longer the time horizon and greater returns you are getting, the more beneficial it could be to pay the fees from taxable accounts.  If the fees are not pulled from the IRA, that money would be left to grow tax-deferred.  On the other hand, if the IRA owner is planning to retire soon and is in mostly conservative investments, it makes more sense to take the fees from the IRA instead.

This strategy is only effective for traditional IRAs.  Roth IRAs are funded with after tax dollars and are not taxed in the future.  Therefore there is no future tax savings by paying the fees out of the account.

Questions on investment expenses under the TCJA? Contact any member of our Private Client Services Team.

The TCJA…So Many Changes, So Many Questions…we can help you navigate this huge tax overhaul! Visit our Tax Reform Center for everything you and your business need to know, now.