Life and Death Planning for Retirement Benefits

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Chapter 8: Investment Issues; Plan Types 391
are 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 C.B. 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
G)).
B. Deductibility of IRA/Roth IRA management expenses. 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 and to the reduction of itemized deductions
applicable (through 2009 and after 2010) to high-income individuals under
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, 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 , since after that point all
distributions from the Roth IRA would generally be tax-exempt qualified distributions.
8.1.05 IRAs owning “nontraditional” investments
The list of assets that an IRA is forbidden to hold is brief: life insurance , loans
to the owner and other self-dealing investments , and most “collectibles” . So