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Get a sweeter tax deal on IRA wrap fees

by on
in Management Training

A new private ruling provides the tax “icing on the cake” to IRA holders who pay wrap fees to their brokers. (IRS PLR 201104061)

Alert: According to the new ruling, wrap fees don’t count as traditional or Roth IRA contributions if they are paid separately by the owner. So you can contribute up to the annual contribution limit without any reduction.

The IRA limit for the 2010 tax year was $5,000 ($6,000 if age 50 or older). It stays the same for the 2011 tax year.

Wrap fees typically cover investment advisory services, broker commissions and the like. Normally, broker commissions are treated as contributions. However, unlike broker commissions, wrap fee charges don’t depend on the number of trades. Instead, fees are based on the total assets under management.

Also, the new ruling confirms that you can deduct outside wrap fees for a traditional or Roth IRA as miscellaneous expenses on your tax return, subject to the usual 2%-of-adjusted-gross-income (AGI) threshold. (IRS Revenue Ruling 84-146)

Tip: If you clear the 2%-of-AGI mark for the year, you may deduct the full amount of the wrap fees.

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