IRA Wrap Fees Can Be Paid From Non-IRA Funds
PLR (Private Letter Ruling) 200507021
The IRS has ruled that advisor fees on IRAs known as “wrap
fees” can be paid from non-IRA funds and they will not be
treated as contributions. These fees can be deducted as
miscellaneous itemized deductions. The deduction, however,
can be lost since it is subject to the 2% of Adjusted Gross
Income threshold and Alternative Minimum Tax. This new PLR
applies to wrap fees on both IRAs and Roth IRAs.
What are Wrap fees?
Wrap fees are a name given to an array of investment advisory
and broker fees generally based on the value of your account,
as opposed to straight broker commissions which are tied to
an individual stock buy or sale.
Years ago, Revenue Ruling 86-142 held that broker
commissions tied to an individual stock sale are part of the
stock sale and must be paid from IRA funds. They cannot be
deducted. Broker commissions paid from non-IRA funds are
considered contributions to the IRA. In other words, you are
adding money to your IRA in order to pay fees that should
have been paid by your IRA. Since broker commission on
stock transactions in your IRA must be paid from IRA funds, if
you do pay these fees from outside your IRA, not only are they
considered additional contributions to your IRA, but you also
cannot deduct the commissions like you can for investment
advisory fees. If you pay broker commissions from non-IRA
funds and have already contributed the maximum allowable
amount to your IRA, then you have an excess contribution to
the IRA which will be subject to the 6% excise tax on excess
IRA contributions.
Revenue Ruling 84-146 stated that trustee fees can be paid
from non-IRA funds and those fees are deductible as
miscellaneous itemized deduction also subject to the 2%
Adjusted Gross Income and the Alternative Minimum Tax.
Investment advisory fees fall into this same category and can
be paid from non-IRA funds without being considered an
additional IRA contribution.
This new PLR makes it easier for investors since they do not
have to break down the individual components of the wrap
fees and figure out where each of the different types of fees
should be paid from or whether they are deductible. Now the
IRS has ruled that if they are bundled or “wrapped” in one
overall fee, they can be paid form non-IRA funds without being
deemed an additional IRA contribution, and the fees are
deductible subject to the AGI and AMT limitations.