Confused About Paying IRA Expenses?

Payment of the management fees for an IRA presents planning opportunities--and pitfalls.

By Natalie Choate

Question: Clients may have management expenses or fees with respect to their IRAs. Should these be paid directly from the IRA, or must they be paid that way? Can fees for multiple different accounts be paid all from one account?

Answer: Payment of the management fees for an IRA presents planning opportunities--and pitfalls.
The planning opportunity arises from the following facts: IRS rules provide that management expenses of an IRA may be paid directly from the IRA, and such payment will not be considered a distribution from the IRA for any purpose. Or the IRA owner may alternatively use his outside funds (taxable account) to pay the management expenses of his IRA, and such payment will not be considered a contribution to the account. Thus the IRA owner (or beneficiary, in the case of an inherited IRA) should carefully consider which source of funds is most advantageous. He or she needs to ask: Is my IRA too big (so I should try to shrink it in legal and tax-advantaged ways)? Or is it too small (so I should try to grow it in every legal way possible)?

This is one case in which size does matter.