Custodial Fees and Itemized Tax Deductions
If you have an individual retirement account, you usually incur an annual custodial fee, which is the fee paid to those that manage the investments within the IRA. These custodial fees can qualify as an itemized tax deduction only if they are not already deducted from the IRA account. The company managing your IRA must instead bill you the custodial fees separately, which you must in turn pay out of your own pocket.
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IRAs
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Both a custodial account and an annuity contract make up an IRA. The former part of the account is so-called as a custodian uses the cash in the account to invest in various securities in the financial markets. The custodian is only able to invest in certain types of financial instruments that have a relatively low level of risk and have high ratings from credit rating agencies. All IRA accounts must have a custodian to manage the account.
Custodial Fees
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While the custodians of an IRA account cannot give advice, they use their skills and knowledge for maximizing an investment portfolio linked to an IRA account. For this reason, they may levy a custodial fee. The custodial fee is a set proportion of the amount of money held in the IRA account, usually in the range of one to two percent. In addition, the custodian levies an additional fee for "self-directed" investments. So, if you wish to put a portion of your IRA in a certain investment, the custodian, who must handle all investment transactions of your IRA account, charges a fee for this additional investment request.
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Custodial Fees and the IRS
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When a custodian levies fees on your IRA, it decreases its size. Let's say your IRA is worth $75,000, and the custodian charges a one percent fee for managing your account. This equates to an annual charge of $750. There are two ways this fee is charged. The custodian may deduct the fee directly from the IRA or may bill the customer separately for such fees. The former way is the more common scenario. However, if the customer requests in writing that the custodial fees are charged separately, then the IRS may regard the custodial fees as investment expenses.
Itemized Tax Deductions
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If you pay custodial fees directly out of your pocket, they you may file the fees for tax deductions. These deductions qualify as miscellaneous itemized expenses. You may only file for such a tax deduction if all of your miscellaneous itemized expenses, which may include unreimbursed employee expenses, business liability insurance or computer depreciation, only if they exceed two percent of your annual income. You can report miscellaneous itemized expenses using form 2106-Z, which you can find on the IRS website.
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