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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.

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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.

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