While financial advisor fees are no longer deductible, there are things you can do to keep your tax bill as low as possible. 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 places you in 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 profit, since the resulting capital gain is taxable income. In these situations, you'll need to determine the percentage of the advisor's fees that apply to the taxable income generated by your investments. In other words, if an AUM commission, including financial planning, were 2.5% in a world in which most managers charged less than 2%, the additional fee of 0.5% could raise doubts; but when the AUM fees for financial planning are directly in line with other fees that are limited to investment, the implication—at least from a fiscal standpoint— is that part of the attributable to services not related to investment cannot be that important. You'll need to itemize if you want to request any deductions for your financial planning expenses, and itemizing them may not impose a lower tax liability than requesting the standard deduction.
Therefore, using IRA assets to pay for the IRA owner's personal financial planning expenses would, at best, be a distribution of that amount in dollars and, at worst, a prohibited transaction that would trigger the distribution of the entire account. I write about financial planning strategies and practice management ideas, and I have created several companies to help people implement them. For advisors who have already disaggregated their fees, charging a separate or ongoing advance payment (or both) for financial planning services and an AUM (lower) fee for “investment management only”, tax rules are fairly simple to apply. You can pay investment management fees or financial planning fees structured as a percentage of the assets directly from the account being managed.
If you're not covered by a retirement plan at work, file a single or head-of-household return, or are married and your spouse isn't covered by a retirement plan at work, you can deduct all of your traditional IRA contribution regardless of your income. However, financial planning fees that are not specifically attributable to investment management (or tax planning) are not deductible, but are considered personal expenses. It should be noted that, in this context, it is still important that the client's IRA pays only the investment management fee (AUM) and not part of the financial planning fee (and, in addition, as always, the IRA should only pay its own investment management fee and not the AUM fees from any other account). However, with the rise of wealth management, it is increasingly common for consumers to pay a single “combined” AUM fee, which covers not only investment management services (deductible), but also financial planning (non-deductible).
Michael Kitces is director of planning strategy at Buckingham Strategic Wealth, a provider of turnkey wealth management services that supports thousands of independent financial advisors. Again, be careful about paying part of that financial planning withholding fee from a retirement account, unless it's only the part actually attributable to managing that investment account. These provisions of the tax code allow tax deductibility for expenses such as tax preparation, advice on income and wealth tax planning (although, in particular, drafting estate planning documents is not deductible), ongoing investment management fees and investment advice payments. However, it should be noted that the cost of financial planning advice that does not specifically refer to one of the categories of expenses allowed in Section 212 is not deductible.
. Ultimately, the easiest solution to the problem, at least from a fiscal perspective, is to simply unlink financial planning and investment management fees. .