You probably already know the major tax advantages of contributing to an individual retirement account. You get to deduct your contributions to a traditional IRA, and all of your investments in either a traditional or Roth IRA grow without incurring any current tax obligation. To qualify for those tax advantages, your IRA must be held by a custodian or trustee, who will likely charge IRA custodial fees for their services, and those fees can add up.
Variety of IRA Custodial Fees
Your IRA custodian or trustee might charge a variety of different types of fees to handle your account, depending on the complexity of your account and the types of investments you select for your IRA. For example, your custodian might charge a one-time set up fee, an annual maintenance fee and a termination fee if you decide to close your account or move it to another trustee or custodian. You might also pay other fees, such as sales commissions, transaction fees, mutual fund loads or management fees which are not, strictly speaking, IRA custodial fees because you would pay those charges regardless of the type of account your investments are held in.
No Tax Breaks on Fees
All of those IRA custodial fees can add up over time. The Internal Revenue Service no longer offers you a tax break on those fees. The only tax break you can now take is if you are charged a commission, which is not likely with an IRA. Fees themselves are no longer deductible.
However, when it comes to fees and commissions, what happens in your IRA, stays in your IRA, and is not subject to current income taxes. You may be paying custodial fees, commissions, transaction charges or sales loads. If your IRA custodial services fee is deducted out of your IRA account, and you don't pay them separately, you never could take a tax deduction for them, and you still can't if you are paying a commission.
Like most other financial products, there is a wide range of options when it comes to custodians or trustees. You can choose a bank, credit union, investments brokerage firm, insurance company, mutual fund company or any other financial institution approved by the IRS to serve as your IRA custodian. Each custodian has its own fee structure, and some offer reduced fees for larger investments. Shop around to find the custodian that offers the best fee structure for the type of investments you intend to hold in your IRA, and make sure you understand the IRA management fees structure before investing.
Brokerages and fund managers charge fees to cover costs. Discount brokerage firms are less likely to charge fees, especially if you receive the fees electronically, or maintain a certain balance. Fees are typically between $20 and $50, although they may be as much as 1 percent of the account.
Deductions for 2018
You can no longer deduct fees that exceed 2 percent of your adjusted gross income, as you could prior to 2018. Having the fee deducted directly from your IRA makes even more sense now, because that money is deducted pre-tax. You'll still be paying the fee, but you won't be paying income tax on that money before you pay it out as a fee. Also, you'll be a lot less likely to care about tax deductions in 2018, because the standard deduction is increasing, meaning far fewer people will take deductions than in the past.
Deductions for 2017
For your 2017 taxes, you can still deduct the fees that you pay outside what's deducted from your IRA. But remember, you can only deduct fees that exceed 2 percent of your AGI. So if your AGI is $40,000, you can only deduct fees in excess of $800. Also, fees paid on publicly offered mutual funds are not deductible.
- Internal Revenue Service: Publication 529, Other Expenses
- The Motley Fool: What are IRA Custodial Fees?
- Financial Planning: What the New Tax Law Means For Investment Advisory Fees
- Financial Web: Typical IRA Custodian Fees
- CNBC: The Investment-Fee Tax Break is Gone. Here's What it Means for Individual Retirement Accounts
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.