Written by: Thomas H. Duncan, JD, CLU®, ChFC® | Nationwide Advisory Solutions
A recent Private Letter Ruling (PLR 2019-101342) has created a method for owners of certain, but not all, nonqualified deferred annuities(1) to pay for the investment management fees of that annuity from the cash value of that annuity without income tax consequences. This reverses a long-held principle that distributions from nonqualified deferred annuities to pay for third party investment management expenses where always taxable.(2) This new ruling brings the treatment of investment management fees from certain nonqualified deferred annuities in line with the treatment for IRA third party investment management expenses.
In this paper, we will examine the tax ramifications of paying investment management fees from a variety of sources and accounts, with a special focus on the new rules for certain nonqualified deferred annuities. Key Highlights Include:
- Payments of investment management fees for individuals are no longer tax-deductible because of rules changes in the Tax Cuts and Jobs Act
- Distributions from IRAs for investment management fees for IRAs may be made directly from the IRA income tax-free
- Distributions from eligible nonqualified deferred annuities for investment management fees for the annuity may be made directly from the annuity income tax-free
- Distributions from noneligible nonqualified deferred annuities for investment management fees are taxable to the extent of gains in the contract and possibly subject to a 10% tax penalty, unless an exception applies to annuity to the third-party