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. These are the fees your financial advisor charges to maintain your account.
They are an investment expense as a disaggregated deduction. 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. Others, such as Charles Schwab, only charge custody fees for investments in non-publicly traded IRAs. 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.
If you look at your individual retirement account (IRA) statement, you'll be surprised to find that you pay a fee simply because of the privilege of having an IRA. Most online discount brokerage firms don't charge custody fees to IRAs or exempt them from people who choose to receive documents and statements electronically. The cost basis is generally equal to the purchase price of an investment plus any expenses necessary to acquire that asset, such as commissions and transaction fees. Because IRA depositary fees and related investment advice fees can be paid from retirement accounts, as long as the commission is attributable only to the retirement account.
Fortunately, if you paid custody fees or other investment-related charges in the past year, you may be entitled to a deduction from your income taxes. These fees can be avoided and are less common among self-managed IRAs than among IRAs held by a financial advisor. Line 23 of Schedule A, the IRS form used to declare itemized deductions, allows you to deduct investment management and custody charges from your income. Fees don't qualify, nor do fees paid on publicly offered mutual funds, which may represent the majority of fees paid in a given year for most retirement accounts.
Few investors have assets like these, and even fewer hold them in an IRA, making it highly unlikely that the average person will face these fees. As with deductible expenses, it doesn't make sense to pay a fee just to recover part of it in the form of a tax deduction on your income. Instead, for tax purposes, the fee is offset by account earnings when you start withdrawing funds from your retirement account.