What about the financial planning fees or fees that financial professionals charge for consulting on a per-project or hourly basis? Unfortunately, none of these charges are directly related to income production or investment transactions, so nothing can be derived as a deduction from these expenses. The Internal Revenue Service allows you to deduct the fees you pay for investment advice and advice, but there are limitations. You can only cancel those charges if the investments bring you taxable income. Things can get a little complicated if your investment advisor puts you on tax-exempt municipal bonds, since the interest on those bonds is not taxable income.
Things get even more interesting if you then sell your municipal bonds for a profit, since the resulting capital gain is taxable income. In these situations, you will need to determine the percentage of the advisor's fee that applies to the taxable income that applies to your investments. However, at least some clients, especially those with lower income levels, with more optimistic growth rates and very long time horizons, may at least consider paying advisory fees with external dollars and simply avoid the tax benefits of paying directly from the IRA. And while an advisor may choose not to sell certain individual positions in the account, the uniformity and non-customisability of an investment fund implies that any position held for tax purposes could be overweight from an asset allocation standpoint when repurchased indirectly through the investment fund.
You can't take a family vacation and deduct the total cost just because you stopped to say hello to your financial planner. In other words, people do better (from a fiscal perspective) to have C shares with a 1.5% spend rate (including a 1% 12b-1 route) in a brokerage account than to have an advisory account for which they are billed a 1% AUM fee and have institutional versions of the same funds with an expense average ratios of 0.5% (eliminating 1% in 12b-1 fees). Consequently, the chart below shows how many years a tax-deferred IRA would have to grow without being liquidated, to overcome the loss of the tax deduction that comes from paying the counseling fee on a non-deductible basis in the first place. However, the only caveat to this approach worth recognizing is that while paying an IRA advisory fee is pre-tax (i).
However, while advisors do not have the ability to reverse changes to the Tax Cuts and Jobs Act, depending on the client's circumstances and the advisor's business model, there may be several ways to potentially mitigate the loss of the counseling fee deduction and preserve at least part of your pre-tax payment treatment. However, this may require the RIA to change its investment philosophy a bit, as many advisors not only reduce the number of shares they hold for a client as the client becomes more conservative, but they also change the composition of those shares. Since advisory fees attributable to Roth IRAs were never deductible in the first place (because Roth IRAs produce federal tax-free income), the Tax Cuts and Jobs Act did not change the calculation and, in essence, everything remains the same. The elimination of itemized deductions and, specifically, the IRC Section 212 deduction for expenses associated with income production is particularly important for advisors, since investment management fees are no longer deductible on the personal income tax return.
And, at a minimum, advisory firms will likely want to maximize the billing of traditional IRA advisory charges directly to those accounts, where possible, since a payment from an IRA (or another traditional retirement plan from an employer) is implicitly “tax-deductible” when made from an account before taxes in the first place. After all, investment interest expenses are still deductible under IRC Section 163 (d) to the extent that it exceeds net investment income; consequently, the investment advisory fee (and other Section 212 expenses) could be similarly reinstated as a similar deduction (to the extent where it exceeds net investment income). Alternatively, some advisory firms may consider limited partnerships as another potential method of mitigating the loss of the deduction for advisory fees, seeking to reclaim the RIA fees as a “management fee” for the company, rather than a transfer fee from the partnership investment. If an advisor provides expert advice to the trust that goes beyond what is traditionally provided to individuals, this additional portion may be deductible from the trust, he says.
This is because many mutual funds have different classes of shares, and all other things being equal, a client with a taxable account is better off (from a tax perspective) to have compensation from their financial professional arising from taxable income reduction charges 12b-1 (heavily maligned), rather than a through counseling fees. . .
Leave Message