One of the major changes resulting from the passage of the Tax Cuts and Jobs Act was the elimination of all miscellaneous itemized deductions. This category of deductions included unreimbursed job expenses, tax preparation fees, and investment advisory fees. As a result, investment advisory fees will no longer be deductible starting in 2018. For clients of an Investment Advisor firm, this has implications for how fees should be charged.
- Prior to TCJA, an investor might want to pay IRA investment advisory fees from outside sources. But now that TCJA has eliminated the deductibility of investment advisory fees, a pre-tax IRA should always pay its own investment advisory fee if possible. This is because the payment of an advisory fee from a pre-tax IRA is not treated as a taxable distribution, and is therefore in effect a pre-tax payment of investment advisory fees.
- Roth IRA assets include post-tax contributions and investment earnings that will never be subject to tax. Therefore, Roth IRA investment advisory fees should still be paid with outside funds if possible, despite the fact that those fees are no longer deductible. The same would be true for 529 assets or H-S-A assets that are managed by an investment advisor.
One possible strategy would be to pay all investment advisory fees from pre-tax IRA assets. However, this is not permitted by the IRS, which only allows the use of pre-tax IRA funds to pay these fees to the extent they are related to the management of those assets.
|Account Type||Strategy for Advisory Fee Payment|
|Pre-Tax IRAs||Pay its own advisory fee|
|Non-Qualified Accounts||Pay its own advisory fee or from outside assets|
|Roth IRAs||Pay from a non-qualified account or from outside assets|
|529s and H-S-A’s||Pay from a non-qualified account or from outside assets|
If you are a client of Core Wealth Management, Inc., we are already optimizing the payment of your advisory fees according to this strategy. If you have questions, please feel free to contact us at 561-491-0231.