IRAs

Paying Money-Management Fees From Your IRA

Though the charges can be deducted directly from the IRA with no penalty, it may be better in the long run to pay them out of pocket.

I may turn my IRA over to a money manager who charges a 1% annual fee. Can that money come directly from the IRA without triggering taxes or a penalty? I am under 59½.

Yes, the management fee can be deducted from the IRA, and it's treated as an expense of the IRA rather than a distribution, so it isn't taxable or subject to the penalty. But just because you can have the fee deducted from the account doesn't mean you should, says Jeff Levine, IRA technical consultant with Ed Slott and Co., which provides IRA information for financial advisers.

It's often best to pay the management fee out of your pocket instead, if allowed by the company, says Levine. True, you don't have to pay taxes on IRA money you use to pay the fee, so it's cheaper than using after-tax money. But "if the fee is deducted directly from the account, you're reducing the amount of money that is growing tax-deferred for retirement," he says. "This would be even worse with a Roth IRA, in which you're stripping away money that would otherwise be growing tax-free for life."

You also can count investment management fees you pay out of pocket as a "miscellaneous itemized deduction," such as unreimbursed employee expenses and job-search costs, which are tax-deductible after these types of expenses total more than 2% of your adjusted gross income.

Most Popular

Should You Consider a Roth Conversion While the Market is Down?
Roth IRA Conversions

Should You Consider a Roth Conversion While the Market is Down?

Investors who are hurting right now as the stock market takes a hit may want to console themselves with a possible tax bargain created by a Roth conve…
May 16, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
10 Substantial Stock Splits to Put on Your Radar
stocks

10 Substantial Stock Splits to Put on Your Radar

Stock splits can provide a short-term boost for investors. Here are 10 of the most notable names splitting their shares this year.
May 13, 2022

Recommended

12 States That Tax Social Security Benefits
social security

12 States That Tax Social Security Benefits

You may have dreamed of a tax-free retirement, but if you live in one of these states, your Social Security benefits may be subject to state taxes.
May 17, 2022
10 Least Tax-Friendly States for Retirees
retirement

10 Least Tax-Friendly States for Retirees

Retirees in these states are likely to have a higher overall state and local tax burden than retirees in other states.
May 16, 2022
Should You Consider a Roth Conversion While the Market is Down?
Roth IRA Conversions

Should You Consider a Roth Conversion While the Market is Down?

Investors who are hurting right now as the stock market takes a hit may want to console themselves with a possible tax bargain created by a Roth conve…
May 16, 2022
Thinking about Rolling Your 401(k) into an IRA? 7 Deciding Factors to Consider
IRAs

Thinking about Rolling Your 401(k) into an IRA? 7 Deciding Factors to Consider

When you’re weighing a possible rollover from your company retirement account into an IRA, there are several things to think about first.
May 16, 2022