When Are IRA Investment Fees Deductible?
The IRS allows taxpayers to deduct expenses related to earning money when they intend to pay tax on that income. This applies to a computer purchased for business purposes, fees from tax preparers and even some investment expenses. With traditional investment accounts, these expenses are deducted somewhat indiscriminately, however, the tax-protected nature of the IRA requires a more precise approach.
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Eligible Fees
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Fees associated with account maintenance or advisory services are eligible for deduction on annual 1040 tax forms. In addition, taxpayers may deduct the cost of information: subscriptions to investment magazines, newspapers or websites are part of the advisory and decision-making process.
Ineligible Fees
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Commissions charged for buying and selling securities are not deductible. Front- and back-end load fees for mutual fund trades are also ineligible. These fees become part of an asset's cost basis, and serve to reduce the overall capital gain and any resulting tax.
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Fee Payment
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Fees paid with IRA assets are not eligible for deduction. IRAs differ from regular investment accounts because they are trusts. This means that while an IRA owner controls the assets and is the beneficiary of any distributions, she does not own the assets herself and cannot take a deduction for fees within the account. However if the owner pays the fee directly, he takes on the obligation for himself, which reduces income and becomes eligible for deduction.
Benefits of Deductions
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IRA fees paid by the owner leave more money in the account. For Roth IRAs, this means greater opportunity for tax-free growth. With traditional IRAs, it means more opportunity for tax at a later date. While a fee deduction offers a solid benefit for traditional IRA owners in the short-term, it may not be the best long-term strategy for everyone.
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References
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