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Should You Pay Advisory Fees Directly from Your IRA?

| October 19, 2020

There are two options available for paying investment management fees attributable to your traditional IRA. The first option is to deduct fees directly from your IRA, and the second option is to pay the fees from funds held outside your IRA.

Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), the second option may have made more sense as advisory fees could be deducted under miscellaneous itemized deductions; 2% adjusted gross income (AGI) limit withstanding. However, this deduction was repealed as part of the TCJA.

The current arguments for these two options are:

  1. Paying fees directly from the traditional IRA is essentially taking a deduction by paying an after-tax bill with pre-tax funds.
  2. Paying fees from outside sources allows the investor to maintain a larger pre-tax IRA that can provide years, or even decades of tax-deferred compounding growth.

While both options have merit, most analysis shows that the tax savings from deducting fees directly from your traditional IRA exceed the compounding growth recognized from leaving the funds in the IRA and paying from outside sources. There is a breakeven point where the growth exceeds the tax savings, but that typically takes a long period of time.

See the graph below from analysis provided by financial planner and blogger, Michael Kitces.

Everyone’s situation is unique, so if you need help with decisions such as these, please give us a call.