Maximizing the Benefit of Your Investment Yields

February 8, 2012

Tax deferred (or tax free in the case of a Roth IRA) growth unreduced by investment advisor fees can increase investment yields significantly over time.

Investment advisory fees are usually automatically deducted from your account. This also applies to IRA accounts. Some investment advisors notify you that the amount will be withdrawn by a certain date unless you make a separate payment and some advisors simple charge your account without offering you a choice of payment first (as it is likely the advisor does not want to highlight the fee).   In either case, you may want to consider paying this fee from a different account and not have the fee reduce your IRA balance.

In order to qualify to make the payment from outside the IRA account, the fee you are paying to your adviser must be a wrap fee, or a fee calculated as a percentage of the assets your adviser is managing.  If your adviser is compensated by trade-related commissions, you cannot separate them from your account and take advantage of this strategy.

The principal advantage of making the payment from sources outside your IRA is the continued tax deferred growth on this amount and also could (depending on your individual tax circumstances) result in a current tax deduction for the fees paid. However, there will be no federal benefit associated with such a tax deduction for those that are subject to AMT or do not have miscellaneous itemized deductions in excess of 2% of their AGI.

For more information, please contact your Perelson Weiner tax partner.

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