Personal Finance

Forget taking this tax break on your 2018 return if you have an IRA

By March 25, 2019 No Comments

If you have an individual retirement account, you’re going to miss out on a tax break this spring.

miscellaneous itemized deductions to the extent they exceeded 2 percent of your adjusted gross income.

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In 2016, about 13 million returns claimed these deductions, according to data from the IRS.

IRA fees can vary, and they often have several components to consider.

For instance, the average expense ratio of an actively managed equity mutual fund was 0.76 percent in 2018, according to the Investment Company Institute.

The average cost of an index equity mutual fund is around 0.08 percent, ICI found.

Meanwhile, custodial and service fees cover the cost of recordkeeping and sending documents.

These fees are generally low — Vanguard charges $20 for each brokerage account, for instance — and can be waived if you maintain a certain level of assets or you sign up for e-delivery of your documents.

While taxpayers couldn’t take a break for fees paid directly from an IRA, they could use other funds to cover the expense and then take the deduction.

“Before this year, my advice was always, ‘With IRA fees, pay them from the taxable account so that you get the deduction and the money keeps growing,'” said Ed Slott, a CPA and founder of Ed Slott & Co. “No more.”

Now it might be time to rethink the best way to cover those costs.

Your IRA’s growth and your time horizon are two key factors that will help you determine whether it still makes sense to use a taxable account to cover the cost of the IRA, according to Jeffrey Levine, CPA and CEO of BluePrint Wealth Alliance in Garden City, New York.

“The greater the growth in the IRA and the longer the time horizon, the more it would skew you toward taking money from an outside account,” said Levine.

This way, fees you would have otherwise taken from the IRA will be left to continue growing on a tax-deferred basis over time.

On the other hand, if you’re retiring fairly soon and you’re investing conservatively — meaning you’re not taking too much risk and you aren’t earning much in returns — you might be better off paying the investment fees directly from the IRA.

“You’re not giving up as much tax-deferred growth if you take the fee out of the IRA,” said Levine.

Always use taxable accounts to pay fees related to your Roth IRA.

You pay income taxes on money you contribute to a Roth IRA, but your contributions grow tax-free and you can take tax-free withdrawals in retirement.

“Keep that tax-free Roth IRA growing,” said Slott.

While you can use your taxable account dollars to foot the bill for your IRA and Roth IRA costs, you can’t dip into the IRA to cover Roth IRA costs.

Similarly, you can’t use the Roth IRA to pay those IRA fees.

“You can never pay from the IRA the fees for anything else but the IRA or it would be a prohibited transaction,” Slott said. “Neither the traditional nor the Roth IRA should be used to pay the expenses of any other account.”

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