Life and Death Planning for Retirement Benefits

Chapter 8: Investment Issues; Plan Types

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not considered management expenses. If the IRA owner pays the IRA’s brokerage commissions from his taxable account, such payment is considered a contribution to the IRA. Rev. Rul. 86-142, 1986-2 CB 60. With a so-called “wrap” investment account, offered by some brokerage firms, the customer does not pay any separate brokerage commissions. The commissions for trades are included in the “wrap” fee, which is a percentage of the assets in the account. In PLR 2005-07021, the IRS ruled that the wrap fees charged to the applicant-firm’s IRA clients could be paid by the IRA owners using outside assets, without causing a deemed contribution, because the wrap fee was “calculated as a percentage of the ...assets,” included an unlimited number of transactions, and did not “vary with the frequency of the transactions performed.” If the IRA itself has already paid the investment manager’s fee, the IRA owner cannot reimburse the IRA for that expense. There is no longer a debt to the provider of the investment management services. As a voluntary payment to the IRA, the “reimbursement” would be treated simply as an IRA contribution. Though an individual can pay his IRA’s (or Roth IRA’s) separately billed investment management expenses from a taxable account, it would not be proper to cause the investment expenses of his Roth IRA to be paid by his traditional IRA. The IRS could attack this as a taxable distribution from the traditional IRA. The IRA’s payment of its own expenses (such as an investment management fee) is not a distribution, and accordingly does not count towards fulfilling the required minimum distribution ( ¶ 1.2.02 (G)). B. Deductibility of IRA/Roth IRA management expenses. § 212 allows individuals an income tax deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year ...for the management, conservation, or maintenance of property held for the production or collection of income ....” This is a miscellaneous itemized deduction, subject to the “two percent floor” of § 67 , and to the reduction of itemized deductions applicable (before 2010 and after 2012) to high-income individuals under § 68 . The IRS acknowledges in Publication 590, “IRAs” (2009, p. 12), that “Trustees’ administrative fees that are billed separately and paid in connection with your traditional IRA ...may be deductible as a miscellaneous itemized deduction on Schedule A (Form 1040).” However, § 265 denies a deduction for otherwise-deductible expenses “allocable” to income that is tax-exempt, or, as the regulations put it, “Wholly excluded from gross income under any provision of Subtitle A” or any other law. Reg. § 1.265-1(b)(1)(i). Though there is as yet no IRS pronouncement on the subject, it would appear that investment management fees allocable to a Roth IRA would be nondeductible under this provision once the account owner has fulfilled the Five-Year Period and triggering event requirements ( ¶ 5.2.04 ), since after that point all distributions from the Roth IRA would generally be tax-exempt qualified distributions.

IRAs owning “nontraditional” investments

The list of assets that an IRA is forbidden to hold is brief: life insurance ( § 408(a)(3) ), loans to the owner and other self-dealing investments ( ¶ 8.1.06 ), and most “collectibles” ( § 408(m) ). So