Your Advisor’s 1% Fee on a $1 Million Portfolio Is $10,000 a Year, and OBBBA Made It Permanently Non-Deductible. Paid Out of the IRA Instead of Your Checking Account, It Comes Out Pre-Tax, and Most Clients Are Never Asked Which
Congress just closed the last door on deducting your advisor's fee, yet one quiet paperwork choice still decides whether you pay it with taxed or untaxed money. Most retirees never get asked, and the default usually costs them.
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A retired married couple has $1 million in a rollover IRA and an advisor who charges 1%. That works out to $10,000 a year. Each January the bill arrives, and each January they pay it from joint checking, because that’s how the account paperwork was set up years ago.
That habit costs them about $2,200 a year in federal tax. If the custodian took the same fee straight out of the IRA, it would come out of pre-tax money. Since Congress made the ban on deducting the fee permanent, the IRA is the only place left to get any tax break on it.
OBBBA Made a Temporary Fee Ban Permanent
Advisory fees are treated as “miscellaneous itemized deductions” under federal law. Before 2018, you could deduct them to the extent they exceeded 2% of adjusted gross income, per 26 U.S.C. § 67(a). The 2017 tax law suspended that deduction through 2025.
The One Big Beautiful Bill Act, signed July 4, 2025, removed the end date. Section 67(h) now says no miscellaneous itemized deduction is allowed “for any taxable year beginning after December 31, 2017,” with no sunset at all. The change applies to taxable years beginning after December 31, 2025.
Here’s what that took away. Under the old rules, our couple with $150,000 of AGI could have deducted $7,000 of the fee. Today they can deduct nothing. Itemizing barely matters either way, since the 2026 standard deduction for joint filers is $32,200.
How an IRA-Paid Fee Works Like a Hidden Deduction
When the custodian deducts an advisory fee from the same IRA it covers, the IRS has long treated the payment as an account expense rather than a distribution. You get no 1099-R and the fee never shows up as income. The money leaves the account without ever being taxed.
Assume a 22% federal bracket in 2026 and the full $1 million sitting in the traditional IRA:
| Item | Paid From Checking | Paid From IRA |
|---|---|---|
| Advisory fee | $10,000 | $10,000 |
| Type of dollars used | After-tax | Pre-tax |
| Real after-tax cost | $10,000 | $7,800 |
| Annual tax advantage | None | $2,200 |
Every IRA dollar will be taxed at 22% eventually, which means $10,000 in the IRA is really worth $7,800 to spend. Paying the fee with those dollars costs $7,800 in real spending power.
It also helps to see it the other way around. Suppose the couple pulled money out of the IRA to refill checking after paying. They would need to withdraw $12,820.51, give up $2,820.51 in tax, and drive their income higher. In the 24% bracket the annual savings rise to $2,400. Over a decade in the 22% bracket, the gap totals $22,000 before state tax and investment growth.
There are side benefits too. A smaller IRA means smaller required minimum distributions later. And since the fee never counts as income, it stays out of the MAGI that sets your Medicare IRMAA premiums.
When Checking Still Wins
Roth IRAs work in reverse. Roth money is never taxed again, so a fee paid from the Roth spends your most valuable dollars. When possible, pay Roth fees from outside the account.
Paying from checking can also make sense if you expect a much lower tax rate later, or if heirs in low brackets will inherit the IRA.
One line you should never cross: using IRA money to pay the fee on your taxable brokerage account. That counts as a taxable distribution, and experts warn it risks being a prohibited transaction. If it is, the IRS says the account stops being an IRA as of the first day of that year and is treated as having paid out all its assets at fair market value.
Ask for Account-Level Billing Before Your Next Invoice
This choice reaches a lot of people. SEC Form ADV data lists 17,263 registered advisers serving 9,862,206 high-net-worth clients. All 20 of the largest firms by high-net-worth client count list percentage-of-assets fees. The filings don’t show which account those fees are taken from, and in practice the default is often whatever was checked on the original paperwork.
- Ask your advisor to bill each account for its own share of the fee.
- Have the traditional IRA’s fee taken directly from the traditional IRA.
- Pay Roth and taxable-account fees from outside money.
- Look over January’s statements and 1099-Rs to make sure no fee shows up as a distribution.
The most common mistake is “householded” billing, where one bill for the whole household gets taken from a single account, often the wrong one. An IRA should only pay advisory fees attributable to managing that IRA; using IRA funds to cover fees for a taxable brokerage account can trigger prohibited-transactions rules and jeopardize the account’s tax-advantage status. Before you change anything, it’s worth running the numbers with a CPA or fiduciary advisor, especially if Roth conversions or IRMAA thresholds are in play. The non-deductible fee rule is one of several quiet IRS rules that drain retirement accounts, and we mapped the rest in a free tax trap guide here.
Contact [email protected] for any questions or corrections.
Vilma Rios is a tax professional, tax researcher, and financial writer with more than 15 years of experience in tax and accounting. Her work spans federal tax research, financial journalism, retirement planning, investment taxation, capital gains, inherited assets, and tax education. She specializes in translating complex tax and financial topics into clear, practical information that helps individuals, families, retirees, and investors make informed decisions.
She has presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as "Your Tax Geek," Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
