The Internal Revenue Service lays down the rules on retirement accounts such as Individual Retirement Accounts and 401Ks. For example: you can deduct contributions to a traditional IRA, up to an annual limit, or take withdrawals tax-free from a Roth IRA. Although advisory fees to run a brokerage account are normally tax-deductible, that doesn't apply to any fees charged directly to a retirement account. To deduct these costs, you have to pay them with outside funds.
Active Management and Fees
A bank or financial adviser that is actively managing your retirement account will normally charge a fee, usually a percentage of total assets in the account. Although the IRS allows you to deduct advisory fees and commissions, this does not apply to costs that you pay directly from the funds in the retirement account. If the manager simply deducts the fee from cash in the account, you can't deduct it.
Reimbursements and Deductions
If your retirement account pays a fee, and you reimburse the account to pay for it, the IRS considers that money to be an additional contribution. It counts toward your annual limit, and in the case of a traditional IRA would be deductible. You can claim any deductible contribution for any year up to April 15 of the next year, which is the filing deadline for your federal tax return. The IRS does not consider the payment of any fees out of the account to be a distribution from the account.
If you pay for advisory fees from non-account funds, you can deduct the cost. You would accomplish this by writing a check from a non-retirement account, or using a credit card. Keep the fee statement so that you can back up the expense if the IRS questions it.
To deduct an advisory fee, you must itemize deductions on Schedule A of your federal return. Investment expenses go on Line 23 of this form, and are subject to the "two percent rule." The sum of all miscellaneous deductions -- which also include tax prep fees and unreimbursed employee expenses -- must exceed 2 percent of your adjusted gross income to be deductible. You can't take the standard deduction and also write off investment costs.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.