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How to Get Paid for Retirement Plan Advice: After-Tax Dollars

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In my earlier blog, I explained how advisors can get paid for individual company retirement plan advice in pre-tax dollars. A second way to get paid for this retirement plan advice is directly through personal checks. 

In June of 2009, Jack Reutemann of Research Financial Strategies and I began to present the “No More Pies” seminars for Bill Good Marketing

The first day of the seminar, I teach the finer points of the Dorsey Wright & Associates, Inc. database.  The second day of the seminar Jack teaches the fine points of his technical analysis and tactical asset allocation-based stock market risk-management game plan.

A big part of the two-day seminar is focused on how to provide investment advice to individual company retirement plan participants. The seminar content includes how to work with a fixed menu of company retirement plan mutual funds or the Self-Directed Brokerage Account, or SDBA, option.

Jack is a master at the concept of prospect and client presentations, and one of the major parts of his presentations focuses on providing the prospect or client with the option of paying company retirement plan investment advisory fees either in pre-tax or after-tax dollars.

A key point Jack shares is that it makes no economic sense for the client to pay asset management fees from a qualified plan account.

As an example, an individual retirement plan advice client with a $1 million company retirement plan account would pay annual advisory fees of 1.5% or $15,000 per year.

Those advisory fees would be deducted from the company retirement plan account. In this case, the annual advisory fees would almost completely wipe out that client’s annual contribution of $17,500 if he or she is under 50 years old or $23,000 if he or she is over 50 years old.

A qualified plan account has a finite amount of money contributed during a client’s working career through employer contributions, employee contributions or growth of principal. 

In an IRA rollover of a company retirement plan account, it makes even less sense to pay advisory fees out of that account.  An IRA rollover in most cases is never going to have more money added to the account.

The IRS rules that advisors need to know all fall under section 212 of the tax code.  These investment advisory fees, the code says, are a tax deduction on Form 1040 under miscellaneous deductions on Schedule A.  All qualifying fees are lumped together under a 2% limitation. 

Many individual company retirement plan advice clients have found that these qualified account investment management fees are a helpful addition to their miscellaneous fees tax deductions every tax year.

Paying advisory fees outside a qualified plan account will increase the amount of miscellaneous deductions that exceed 2% of adjusted gross income.  This would make a portion of the annual investment advisory fees paid for a company retirement plan account tax deductible every year. 

Standard disclaimer here: I am not a tax advisor. However, I do talk to tax advisors regularly; and have several as clients.  The third-party investment advice fee deduction on an individual company retirement plan account works for most of my clients.

The individual company retirement plan advice client may be better off economically by paying the advisory fee with after-tax dollars and not lowering the qualified account value. In addition, the client can be better off most times from a tax point of view with this arrangement. 

The most important lesson is to give your individual company retirement plan advice clients the pre-tax or after-tax option.  You get paid; and the client benefits.



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