Not many retirement account holders know this, but paying IRA custody fees is usually tax-deductible. Under Internal Revenue Service (IRS) rules, instead of the standard deduction, you can deduct certain expenses as “miscellaneous itemized deductions.” You can do this on Annex A (Form 1040 or Form 1040NR). These annual IRA management fees may be tax-deductible, in accordance with the detailed deduction rules. As long as the fees are billed and paid separately with IRA funds.
Custody expenses are tax-deductible under certain conditions. If you itemize your deductions and your miscellaneous expenses exceed 2 percent of your adjusted gross income, you can deduct your custody expenses. This only applies to investors who pay these fees out of pocket. Those who pay these fees directly with the IRA cannot deduct this expense.
The bank or brokerage agency that owns the IRA usually charges a custody fee, which covers the cost of managing and accounting for the account and any changes made to the IRA. Banks, in particular, can waive fees for customers who have other accounts, such as a savings account or mortgage, with the bank. In other words, IRA management fees paid with cash or personal check that are not deducted from the IRA can be deducted as investment expenses, subject to detailed deduction limits. The IRS recently confirmed that “general fee” type agreements, such as assets under management and investment advisory fees, can be paid with external taxable dollars and still be deducted as Section 212 expenses, subject to detailed deduction limits.
Others don't charge custody fees to customers who accept online statements instead of paper statements, or to those who set up the automatic transfer of funds from a bank account to the IRA. While you couldn't take a break to pay the traditional fees for individual retirement accounts that you paid directly from the account, you could use other assets to cover those costs and then request the deduction. The same applies to a retirement account where it is subject to investment management fees associated with the retirement account. If you're looking for a way to reduce your expenses and you're comfortable selecting your own funds, choose a free account.
Instead, for tax purposes, the fee is offset by account earnings when you start withdrawing funds from your retirement account. This is because the fees you would otherwise collect from that IRA will continue to increase with deferred taxes over time. A custody fee is simply a fixed fee charged by a bank or brokerage agency to manage or administer an IRA. Meanwhile, if you're thinking about retiring fairly quickly and your assets are held in mostly conservative investments that don't generate much profit, it might make more sense to deduct the investment fee directly from the IRA.
Now that you can't qualify for tax relief for these costs, here's how you should consider paying for the costs related to your IRA. Before opening an IRA, take the time to understand custody charges and how they're calculated to make sure you get the best possible deal.