commission costs on Roth trades -- tax deductible?

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commission costs on Roth trades -- tax deductible?

Postby patrickrenault » Sat May 28, 2011 6:14 am

What are the rules on deducting stock trade commissions from your personal income tax?

I believe the norm is to adjust the cost basis on stocks to include the commission, and then also reduce the sale price by the commission paid on the sale trade -- this way you only get taxed on the actual gain.

But what about doing trades within a Roth IRA account? Gains are not taxable, and losses are not tax deductible, so it seems the cost of commission (which is generally also paid from Roth funds) escapes the benefit of the tax write-off.

Would it make sense to find a brokerage who would take commission payments from non-Roth money, while the trade itself is with Roth money?
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Postby livesoft » Sat May 28, 2011 6:32 am

It would be worthwhile to find a broker that does not charge commissions. There are many nowadays, so it's easy to find one. We have never paid any commissions on transactions in our Roth IRAs.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: commission costs on Roth trades -- tax deductible?

Postby sscritic » Sat May 28, 2011 9:42 am

What does the IRS say about this? Are you sure the commission is deductible? Is is subject to a 2% floor?
Limits on Deductions

Your deductions for investment expenses may be limited by:
The at-risk rules,
The passive activity loss limits,
The limit on investment interest, or
The 2% limit on certain miscellaneous itemized deductions.
http://www.irs.gov/publications/p550/ch ... k100010205

Which would be easier and take less time? Finding a no-commission broker ala livesoft or figuring out the IRS rules?
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Re: commission costs on Roth trades -- tax deductible?

Postby HueyLD » Sat May 28, 2011 9:53 am

patrickrenault wrote:Would it make sense to find a brokerage who would take commission payments from non-Roth money, while the trade itself is with Roth money?

That would be illegal. Commissions within IRAs are all yours, not deductible anywhere.

So, tread lightly on trading within IRAs.
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Postby patrickrenault » Sat May 28, 2011 10:45 am

livesoft wrote:It would be worthwhile to find a broker that does not charge commissions. There are many nowadays, so it's easy to find one. We have never paid any commissions on transactions in our Roth IRAs.

I have never heard of such a broker. The cheapest broker I've encountered is Interactivebrokers, who charges $1/trade - but then they charge an apparently non-tax-deductible "activity fee" of $10/month to compensate. The cheapest broker I've encountered without activity fees is Optionshouse, which charges $3.95/trade.

How could a broker possibly offer a free service? Is there a high min. cash balance that you don't get interest on? Otherwise I find it hard to believe that web ads could cover the brokers trading costs.

sscritic wrote:http://www.irs.gov/publications/p550/ch03.html#en_US_2010_publink100010205

Which would be easier and take less time? Finding a no-commission broker ala livesoft or figuring out the IRS rules?

Thanks for the reference. I find the first part of that publication too abstract to understand, but further down, this highlighted part makes it clear that taxpayers can in effect deduct commissions, but strangely, only if they add the commission to the cost basis and subtract it from sale prices. Apparently the commission cannot be a separate deduction - which specifically blows it for Roth IRA accounts. So that answers my initial question (and compels more questions).

HueyLD wrote:
patrickrenault wrote:Would it make sense to find a brokerage who would take commission payments from non-Roth money, while the trade itself is with Roth money?

That would be illegal. Commissions within IRAs are all yours, not deductible anywhere.

So, tread lightly on trading within IRAs.

How exactly does the law go about mandating which source commissions are paid from? What would the purpose be in such a law? Given that a separate tax deduction for commissions is not possible, there is no tax benefit from paying costs from a separate account, so why block it? Forcing investors to spend their IRA money pre-retirement only works against the governments attempt to encourage retirement accounts (the gov wants people to have private retirement accounts to keep pressure off the social security problem).

Suppose a broker offers a special deal for people with a Roth account and a non-Roth account. The broker offers buy-one-get-one-free. So you make a trade with a non-Roth account (perhaps at a higher commission), and the broker adds a free trade to your online profile. You then decide to use that free trade on your Roth account. It seems this would be an efficient way to trade without attempting to deduct a non-deductible expense. Do any brokers offer this, or something similar?
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Postby Alan S. » Sat May 28, 2011 3:44 pm

One solution is to sign up for a so called "WRAP Fee" program with your broker. These are flat % fees that would apply against the account balance. Commissions and unlimited trades are included in the fee. You can then itemize the fee as a misc itemized deduction subject to 2% AGI floor and possible AMT limitations, if you pay the fee from non IRA funds. The IRS has recently upheld the original 2004 ruling with new letter rulings this year:

http://www.kitces.com/blog/archives/117 ... llars.html
Last edited by Alan S. on Sat May 28, 2011 4:48 pm, edited 1 time in total.
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Postby DSInvestor » Sat May 28, 2011 4:01 pm

What are you trading and how many trades per year?

Vanguard offers commission free trading for Vanguard ETFs. No minimum acct size.
https://personal.vanguard.com/us/whatwe ... ommissions

TD offers commission free trading of more than 100 ETFs:
http://www.tdameritrade.com/trade/etftr ... 0000000011

Wells Fargo offers 100 free trades per account, if you qualify for PMA package (25K):
https://www.wellsfargo.com/investing/styles/wt/

Fidelity offers commission free trading of 30 iShares ETFs:
http://personal.fidelity.com/products/t ... oad=TAF004
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