Tax-Efficient Way to Pay Advisory Fees

There are a few rules of thumb that are worth a lot.   A new rule of thumb today is paying investment advisory fees directly out of tax-deferred accounts (IRAs, SEP-IRA, etc.) instead of lumping them together and paying for them from a taxable account.  Prior to the Tax Cuts and Jobs Act (TCJA) of 2017 and the revocation of the deductibility of investment expenses, it was a common practice to sweep tax-deferred account advisory fees from a taxable account to get a tax deduction as a miscellaneous expense.  However, with the tax law change, it is now almost always more economically advantageous to have tax-deferred accounts pay their own investment expenses.

This idea has been written about on many outlets since the TCJA implementation in 2018, but I still run into situations where old habits die hard and I still see the lumping going on.  Michael Kitces, the great thought-leader in the advisory space, has done a good job on this topic and wrote about it on his blog ( for more detail on this topic).  In summary, the payment of advisory fees from a tax-deferred account still retains an implicit tax deduction since the withdrawal to pay the advisory fees is with pre-tax dollars.

For example, for every $1,000 in advisory fees at the 24% tax bracket, there is an implicit deduction of $240. Or, in other words, you can pay $1,000 in fees with only $760 in after-tax dollars.   Higher tax brackets and inclusion of state taxes makes the benefit even greater.

An offsetting consideration to this situation includes the idea that leaving assets in a tax-deferred account allows the funds to continue to accrue on a tax-deferred basis.  However, despite this being a true statement, the benefits are much less than thought since the tax-deferred earnings are much less than the value of the tax deduction at high marginal tax rates and it takes a very long time horizon to recoup it!  Kitces produced a table in his article that demonstrates this.  

Additionally, for tax-free Roth accounts, it still makes sense to pay those advisory fees from a taxable account since those funds have the best tax treatment and should be allowed to grow tax free as long as possible.