Around this time of year things start hopping in my office. Working with so many accountants, it’s clear it’s “busy season” yet again!
One of the main questions I get from clients (which ties right into busy season), is “are the investment management fees paid to a financial advisor deductible or not?”
While there’s no cut and dry answer for tax-preferenced accounts such as IRA’s, there is for taxable accounts.
Investment management fees assessed to taxable accounts are tax deductible to a point. They fall under the “miscellaneous itemized deductions” section of your tax return. Miscellaneous itemized deductions are things such as financial advisor fees, tax preparation fees, unreimbursed job related expenses, and subscriptions to newspapers or periodicals.
Under the miscellaneous itemized deduction section, total miscellaneous itemized deductions MUST exceed 2% of your adjusted gross income (AGI) to have any deductibility whatsoever. For many of my clients (retirees), this does become a potential tax deduction as their AGI is lower during retirement typically.
Miscellaneous itemized deductions are however a “tax preference item” for purposes of calculating whether the alternative minimum tax (AMT) applies or not. In some cases, if you’re subject to the AMT – miscellaneous itemized deductions may in fact be NON-deductible or “disallowed”.
For IRA and other tax-qualified accounts, the deductibility of investment management expenses isn’t quite so clearly defined, and in fact is highly debated by CPA’s. Some tax professionals lean towards the “it’s deductible just as it is with a taxable account” argument, while still others insist it’s deductible only if the IRA generates taxable income for the year in which the fee was assessed.
Perhaps the most effective way to handle the fees in these situations is to pay them for both taxable AND IRA/qualified plan accounts from a taxable account (or paid directly). Red Rock Wealth Management provides basic financial guidance and planning in the course of portfolio and investment management, and for some clients extensive retirement planning as well. While the fee is paid quarterly based on a percentage of the investment portfolio typically – the service provided is greater in scope than solely the investment management services, making the fees deducted from a taxable account all-encompassing (rather than investment account management specific). It then becomes a “financial service” fee more-so than an “investment management” fee.
In addition to increasing the potential to deduct financial advisor fees, it keeps more of your hard earned nest egg working for you in a tax-preferenced account – your IRA or other qualified plan!
For more questions, please contact me directly at (702) 987-1607.
Greg
