Is the fee to manager with trading authority in an IRA taxable if withdrawn from the IRA?

[Guest rkal66]

I have set up a rollover IRA (traditional) and I am going to use a financial advisor to trade in the account. The financial advisor is not affiliated with the brokerage firm that hosts the IRA. If I let the manager withdaw her fee from the IRA, is this a taxable event? (I am over 59.5 so there is no 10% penalty problem) The brokagage firm I am using says it is taxable, but another firm says it is not.

[mbozek]

What does the agreement with the IRA custodian say about payment to advisors? As a general rule any assignment of of benefits to another person is a taxable distribution to the IRA owner but the payment of expenses to a third party for service should not be taxable.

[Guest rkal66]

I just got off the phone with Fidelity again and they claim that any distribution from an IRA is reported as a taxabel withdrawal. My advisor, who normally works through Schwab says that her other clients are not taxed on the fee withdrawal. Is there an IRS regulation that I can quote to Fidelity?

[mbozek]

You are dealing with two different financial organizations. As a broker Shwab has a program called one source which allows advisors who place client assets with Schwab to be paid from the fund assets. See section 9.3 of the Schwab IRA agreement. Fidelity is a mutual fund family which does not allow for the hiring of advisors. Why dont you put your assets with schwab so your advisor can get paid?

[Guest rkal66]

The advisor will get paid either way; with Fidelity it appears that the cost to me would increase because I would pay taxes on the withdrawal for the fee. At Schwab, apparently that is not the case.

This is Schwab Institutional, not Schwab one source. The IRA agreement only goes up to section 8.

[QDROphile]

What if you looked at the payment of the fee outside the account (no withdrawal from the account) as the equivalent of a contribution to the account?

[Appleby]

I can’t put my hands on the reference now, but I know that the advisory fee is not a taxable transaction, because it is considered an administrative fee. The custodian should be able to use an invoice from the money manager, along with written permission from you ( the IRA owner) to make the payment as a non-reportable transaction. Many custodians handle this type of request.

[mbozek]

I think it is agreed that the advisory fee can be treated as a expense - the problem is that Fidelity insists on coding the payment as a distribution unlike other custodians and Fidelity's custodial agreement allows Fidelity the discretion to make that distinction. Its easier to find another custodian who will not report the payment as a distribution.