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If you look at your individual retirement account (IRA) statement, you may be surprised to find that you're paying a fee simply for the privilege of having an IRA. These so-called IRA custodial fees are administrative fees that you pay for keeping an IRA open. These fees are avoidable and are less common among self-directed IRAs than they are among IRAs kept with a financial advisor.Fortunately, if you paid custodial fees or other investment-related fees in the last year, then you may qualify for a deduction from your income taxes.
How to avoid custodial fees
Custodial fees cover the cost of managing your IRA. Brokerages and fund managers charge this fee to cover the cost of bookkeeping and communication. All those statements and packages of information you receive, but rarely read, are costly to print and ship.
Most online discount brokerage firms do not charge custodial fees for IRAs, or they waive them for people who opt in to receive documents and statements electronically. Vanguard, which is known for having some of the lowest fees in the industry, will charge you as much as $20 in custodial fees per fund you hold. However, you can completely avoid these fees by agreeing to receive documents electronically, or by maintaining a $10,000 balance in each fund.
Others, like Charles Schwab,only charge custodial fees for IRA investments that are not publicly traded. Few investors have assets like these, and even fewer keep them in an IRA, so it's highly unlikely that the average person will encounter these fees at all. Assets that are not publicly traded include LLC membership units in a hedge fund and ownership stakes in private businesses, for example.
Tax deduction for your custodial fees
Line 23 on Schedule A -- the IRS form used for reporting itemized deductions -- allows you to deduct investment management and custodial fees from your income. These so-called "miscellaneous expenses" are tax-deductible to the extent that they exceed 2% of your adjusted gross income (AGI). For example, a taxpayer who has an adjusted gross income of $40,000 would only benefit from miscellaneous expenses in excess of $800.
Importantly, fees must be paid from cash outside a retirement account in order to qualify. Many brokerages charge fees that are subtracted from your account balance, eliminating your ability to deduct the fees from your taxes.
Also note that not all fees qualify for a deduction. Commissions do not qualify, nor do the fees paid on "publicly offered mutual funds," which can make up the majority of fees paid in any given year for most retirement accounts.
As with deductible expense, it doesn't make sense to pay a fee just to get a portion back in the form of a tax deduction against your income. If you're currently paying custodial fees on your IRA, speak to your broker or advisor about how you can eliminate the fee by signing up for electronic statements or consolidating balances to meet no-fee minimums.
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