IRS Rules on Additional Wrap Programs Paid for Outside of IRAs

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In PLR 201104061 (November 4, 2010), the Internal Revenue Service ruled favorably on the payment of certain wrap fees by IRA owners with assets held outside the IRA. Previously, the Service had ruled that:

-IRA trustee fees ordinarily may be paid outside the IRA without being considered IRA contributions, and deducted by the IRA owner to the extent they satisfy the requirements of Internal Revenue Code §212 (Rev. Rul. 84-146). An annual maintenance fee charged by the trustee for an IRA self-directed brokerage account is another example of such a fee (PLR 8835062). It may be that the fees need to be separately billed and paid to qualify for this treatment (e.g., PLR 9005010); but

-Brokerage commissions and fees paid outside the IRA would be considered IRA contributions and only deductible within the limits of §219, because they are intrinsic to the value of the IRA’s assets rather than recurring administrative or overhead expenses incurred in maintaining the IRA (Rev. Rul. 86-142). These two revenue rulings are applications of principles developed for qualified retirement plans; except

-“Full” wrap fees may be paid and deducted outside a traditional or Roth IRA, provided that the fee is based on a percentage of assets under management, paid periodically rather than on a transactional basis, and does not vary with the number or frequency of the transactions performed (PLR 200507021). This ruling considered five different fact patterns involving various discretionary and non-discretionary investment services, including one fact pattern where primarily brokerage services were provided; a securities trading service was included in all five arrangements. In the Service’s view, the fees for all those arrangements were recurring fees for account administration or overhead akin to those considered in Rev. Rul. 84-146.

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Published In: Finance & Banking Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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