Generally, fees you pay to financial advisers and tax advisers are deductible as a miscellaneous itemized deduction on your individual income tax return, or as a business expense on your Schedule C for sole proprietors, or your corporate income tax return for owners of corporations. The specifics about whether and how you may take a deduction for fees related to an individual retirement account vary with the nature of the IRA and with the nature of the fee. Some fees are paid within the IRA itself and are not deductible. The rule of thumb, however, is that for an expense to be deductible, the expense must be related to investment activity that produces taxable income. IRAs do not, in general, qualify.
Types of IRAs
There are four basic types of IRAs. The first two, traditional IRAs and Roth IRAs, are individual plans. These plans aren't carried on a business income tax return, but on a personal income tax return. The second group, consisting of SIMPLE IRAs and SEP-IRAs, are small-business retirement plans. Fees associated with this group are business expenses rather than personal income tax items.
Types of Fees
You can not deduct expense ratios within mutual funds in your IRAs. Each of the four types of IRAs are free of federal income and capital gains tax as long as the money remains in the IRA. You can also deduct fees and expenses you pay to administer accounts that produce taxable income. You cannot generally deduct brokerage expenses that you incur in connection with your IRA or other investment property. The IRS considers these fees to be an expense of the IRA, and not the owner. You may be able to deduct custodial fees under certain conditions.
Tax Preparation Fees
You can normally deduct tax-preparation fees on your personal and business tax returns. If you had an additional reporting requirement because of a rollover to a Roth IRA, for example, or because of a taxable distribution from a traditional IRA, you can deduct the cost of filing the additional paperwork with the IRS.
Small-Business Retirement Plan Credit
Small businesses receive a tax credit to apply toward the cost of establishing a new workplace retirement plan. The tax credit is worth up to $500, or half the cost of establishing a new plan, whichever is lower, as of publication. To claim the credit, file IRS Form 8881 - Credit for Small Employer Pension Plan Startup Costs.
Expenses Paid from Outside The IRA
Some custodial firms structure their payment plans so that fees are paid from outside the traditional or Roth IRA, rather than by the IRA itself. In these cases, you may deduct these fees as a miscellaneous itemized deduction, as you would any other non-IRA related investment expense.
If you do deduct investment fees on your individual income tax return, you must itemize your deductions. These deductions are only good to the extent they exceed 2 percent of your adjusted gross income. Additionally, it makes little sense to itemize deductions if the total amount of your deductions in excess of 2 percent of your AGI is less than the standard deduction, which stands at $5,700 per year for single taxpayers and $11,500 for married taxpayers filing joint returns, as of publication. If your expenses are lower than this figure, you may consider taking the standard deduction instead.
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