Legal Fees

[Randy Watson]

Is there any way that the personal payment of legal fees accrued in connection with preserving the favorable tax status of an IRA would be a prohibited transaction? Must those amounts be paid from the IRA?

[Guest Sieve]

Don't know exactly what you mean by "legal fees accrued in connection with preserving the favorable tax status of an IRA" but, since an IRA is established, drafted and kept in technical compliance by the IRA provider, I must assume that the legal fees you refer to are those of the IRA owner relating to, for example, tax planning of a transaction to make certain that it is a proper IRA investment. Those legal fees are not legal fees of the IRA, but of the individual, so their payment by the individual would not be a prohibited transaction. Moreover, those fees could not be paid out of the IRA without being considered a distribution to the IRA owner, because they are not administrative expenses of the IRA but expenses of the owner (just like expenses of the settlor--i.e., plan sponsor--of a qualified plan cannot be paid from plan assets). And, payment of those fees would not be considered part of the annual maximum IRA contribution for the year, because they are not like transaction fees or brokerage fees and are not IRA administrative expenses. The IRA owner could deduct those legal fees pursuant to IRC Section 212.