Are 401(k) Fees Really Tax Deductible? – Avoid This Mistake + FAQs

Shocking fact: Americans pay tens of billions of dollars in 401(k) fees each year, yet since 2018 they’ve lost the ability to deduct a penny of those costs on their federal tax returns.

Are 401(k) fees tax-deductible? In most cases, no – not for individual 401(k) participants under current federal law.

However, there are important exceptions and strategies (especially for business owners and in certain states) that could save you money.

In this comprehensive guide, you’ll learn:

• The one scenario where 401(k) fees are fully tax-deductible (hint: it’s more common than you think for small business owners)
• How a 2017 tax law change wiped out a popular deduction for retirement investors – and when it might come back
• Which states still let you write off 401(k) fees on your state tax return (you might live in one!)
• A breakdown of every type of 401(k) fee – administrative, investment, individual services – and how each is treated for taxes
• 5 costly mistakes to avoid when managing 401(k) fees and taxes (so you don’t leave money on the table)

Let’s dive into the details so you can understand the rules and maximize your retirement savings.

Federal Tax Law Uncovered: Can You Deduct 401(k) Fees or Not?

Under federal law, most individuals cannot deduct 401(k) fees on their personal income tax return. The IRS once allowed certain investment-related expenses (including retirement account fees) to be deducted as “miscellaneous itemized deductions” – but that changed dramatically with the Tax Cuts and Jobs Act of 2017.

From 2018 through 2025, all miscellaneous itemized deductions for individuals are suspended. This suspension explicitly eliminated the write-off for investment advisory fees, IRA custodial fees, and 401(k) account fees that many taxpayers used to claim. In short, if you’re a 401(k) participant paying fees, you get no federal tax deduction for those fees under current law.

Why the change? Prior to 2018, individuals who itemized deductions could deduct investment fees (including 401(k) management or advisory fees) to the extent they exceeded 2% of adjusted gross income.

That was a tough hurdle – only people with substantial fees or lower incomes benefited. Still, it was a nice perk for some high-balance savers or those paying for financial advice. The 2017 tax reform (TCJA) temporarily scrapped these deductions to simplify the tax code. Unless Congress extends the ban, those deductions are set to return in 2026.

This means 401(k) fees might become deductible again after 2025 for individuals, but nothing is guaranteed. Even if the deduction returns, you’d still need to itemize and have significant fees for it to matter (because of the 2%-of-AGI threshold under prior rules).

Bottom line (for individuals): As of now, you cannot deduct fees from your 401(k) on your federal income tax return. The IRS doesn’t consider 401(k) fees a tax-deductible expense for ordinary investors during the 2018–2025 period.

Paying a $500 401(k) administrative or advisory fee won’t give you any tax break on Form 1040 today. The logic is that your 401(k) is already tax-advantaged – if it’s a traditional 401(k), contributions and earnings are pre-tax, and any fees taken out just reduce the pre-tax balance.

You don’t get to double-dip by also taking a tax deduction for those fees. (Prior to 2018, you could deduct them separately, but not anymore.)

However, there’s one big exception at the federal level: 401(k) fees are deductible to employers. If you own a business or are self-employed and sponsor a 401(k) plan, the plan administration fees, trustee fees, and other costs you pay can typically be treated as ordinary business expenses.

Section 162 of the tax code lets businesses deduct “ordinary and necessary” expenses, and that includes the cost of running a retirement plan for employees. For example, if your company pays $3,000 in 401(k) plan administration fees this year, that $3,000 is 100% deductible against your business’s income.

This directly lowers your taxable business profit. In fact, many small business owners deliberately pay their plan’s fees out of the company coffers (instead of having the fees taken from participants’ accounts) because it’s deductible to the company and it helps employees’ accounts grow faster.

The IRS encourages this by allowing the deduction and even providing tax credits for new plans (more on that shortly).

To summarize the federal situation, here’s how different scenarios are treated:

As you can see, most employees won’t get a tax break for 401(k) fees. But employers absolutely do – and that can indirectly benefit employees. If your employer covers the plan’s administrative costs, they get a tax write-off and you effectively pay nothing out of your account. (In contrast, if fees are taken from your account, you pay with pre-tax dollars but your balance shrinks.) This dynamic is important in understanding who ultimately bears the cost of 401(k) fees.

A Quick History: When 401(k) Fees Were Deductible (and What Changed)

It’s worth noting that 401(k) and other investment fees used to be deductible for individuals in the past, and this could return. Under Internal Revenue Code Section 212, taxpayers could deduct expenses incurred for the production of income (which includes investment management fees, IRA or 401(k) custodial fees, etc.) as itemized deductions.

These were lumped under “Job Expenses and Certain Miscellaneous Deductions” on Schedule A, subject to that 2% of AGI floor. So, for decades, if you paid a financial advisor 1% to manage your IRA or paid a $100 401(k) account maintenance fee out-of-pocket, you could deduct those costs if you itemized and they were high enough.

Enter the Tax Cuts and Jobs Act (TCJA) in late 2017. The TCJA’s Section 67(g) put a hold on all miscellaneous itemized deductions from 2018 through 2025. This sweepingly removed deductions for unreimbursed work expenses, tax prep fees, and yes, investment and retirement account fees.

The rationale was to simplify filings since the standard deduction was also roughly doubled (meaning far fewer people would itemize anyway). The impact: millions of taxpayers who used to deduct investment fees could no longer do so, starting with their 2018 tax returns. If you’re wondering why your tax preparer told you that you can’t deduct your advisory fees anymore – this is why.

Looking ahead, the TCJA provisions are scheduled to sunset after 2025. If no new law is passed, the old rules come back in 2026. That means for tax year 2026, an individual could once again potentially deduct 401(k) or IRA fees (as an itemized deduction under the 2% rule).

Many tax experts are watching this closely. It’s possible Congress extends the ban or makes other changes, so it’s not a guarantee the deduction returns. But it’s on the horizon. In the meantime, do not try to claim 401(k) fees on your federal return – it will be disallowed, and if significant, could even trigger an IRS notice or penalty.

(Tax courts have consistently upheld the IRS’s stance on these post-2018 limitations, so there’s no loophole here for individual taxpayers.)

The One Big Federal Tax Deduction for 401(k) Fees: Employers Take the Prize

While individual deductions are on hold, it’s crucial to highlight again the big tax benefit still available: employer deductions. If you’re a business owner sponsoring a 401(k), virtually all the direct expenses you pay for the plan are fully tax-deductible to your business.

This includes record-keeping and administration fees, plan consulting fees, fiduciary insurance, and any other costs you as the employer pay to run the plan. Deducting these costs reduces your business’s taxable income dollar-for-dollar.

In addition, federal law provides tax credits for small businesses starting new retirement plans: under the SECURE Act and SECURE 2.0 enhancements, a new 401(k) plan can qualify for a startup credit of up to $5,000 per year for three years to offset setup and admin costs, plus an extra credit (up to $500/year for three years) if you add auto-enrollment.

These credits are essentially free money from the government to encourage offering a plan, on top of the deductions.

For self-employed individuals with a Solo 401(k), the situation is analogous: you wear both the employer and employee hat. Any plan fees you pay from your business account (or Schedule C if you’re a sole proprietor) are deductible business expenses.

If you pay Solo 401(k) provider fees personally, you’d treat it as a business expense of your sole proprietorship. Essentially, you get the deduction on your Schedule C or corporate return, not on Schedule A. The takeaway is that the tax code favors those who operate the 401(k) plan (the employer) when it comes to fee deductions.

Tip: If you’re an employee, you might not have control over who pays the plan’s fees. But if you have a high-cost plan, it’s worth talking to your employer about covering more of the fees – remind them those costs are tax-deductible to the company.

Many employers don’t realize they can deduct 401(k) administration costs just like any other business expense. An enlightened employer might choose to pay a higher portion of fees once they understand the tax benefit and the goodwill it creates with employees.

In fact, court cases in recent years (such as Tussey v. ABB and Tibble v. Edison International) have put a spotlight on excessive 401(k) fees – companies have been sued for letting employees bear unreasonably high costs.

As a result, there’s growing pressure for employers to keep fees low or cover them outright. The tax deduction for employer-paid fees helps encourage that behavior.

Now that we’ve covered the federal landscape, let’s break down the types of 401(k) fees you might encounter and how each is handled, both within the plan and on taxes.

Every Type of 401(k) Fee Explained (And Their Tax Treatment)

401(k) plans carry several kinds of fees. The Department of Labor generally groups them into administrative fees, investment fees, and individual service fees. Understanding these categories will not only help you see what you’re paying, but also clarify any tax implications:

• Administrative Fees: These are the costs of operating the plan on a day-to-day basis. They include charges for recordkeeping, accounting, legal compliance, customer service, website maintenance, and other plan management tasks. For example, a third-party administrator might charge $50 per participant per year, or a flat $5,000 annual fee, to handle paperwork and testing for a 401(k). Who pays? Sometimes these fees are taken directly from each participant’s account (you might see a quarterly charge), or they may be covered by your employer. Tax effect: If the fee comes out of your 401(k) account, you’re using pre-tax dollars (so no additional deduction for you).

• If your employer pays it, the employer deducts it as a business expense, and you pay nothing. Either way, as an employee you cannot deduct an admin fee on your personal taxes. As an employer, you absolutely can deduct these fees.

• Investment Fees: These are usually the largest component of 401(k) costs, though they’re often less visible because they’re embedded in the expense ratios of mutual funds or managed portfolios. Investment fees include fund management fees (what the mutual fund company charges to manage the fund’s investments) and sometimes advisor or advisory service fees if the plan offers professional investment management.

• These fees are typically asset-based – e.g. a mutual fund might charge 0.50% annually, which is automatically taken out of the fund’s returns. Who pays? Plan participants ultimately pay investment fees through lower net returns on their investments. You won’t see a bill for it; it’s deducted before returns are credited. Some plans also have an investment advisory service or robo-advisor that manages your allocation for an extra fee (say 0.2% of assets) – again deducted from your account.

• Tax effect: Because these fees are taken from within a tax-deferred account, there’s no separate tax deduction. You effectively pay with pre-tax money, but you can’t deduct the fee on top of that. Prior to 2018, if you paid a financial advisor outside the plan to advise you on your 401(k) investments, you might have deducted that fee as an investment expense – not anymore, under current law.

• Employers usually do not pay investment fees (those are borne by participants through fund expenses), so there isn’t a direct employer deduction here, except if the employer uses a flat-fee investment advisor and pays that on behalf of the plan (in which case that would fall under business expenses and be deductible to the employer).

• Individual Service Fees: These are charged for optional, individualized transactions or services that you choose to use in your 401(k). Common examples include 401(k) loan origination fees, loan maintenance fees, withdrawal or distribution fees, QDRO processing fees (if splitting your account in a divorce), and sometimes fees for rolling over your 401(k) into an IRA or for specialized advice services.

• These fees are typically charged to the individual’s account as a flat dollar amount at the time of the transaction. For instance, you might be charged a $75 fee to initiate a loan from your 401(k) or a $50 fee for a hardship withdrawal processing. Who pays? You do, by having that amount deducted from your account balance (or from the withdrawal itself). Tax effect: There’s no tax deduction for these personal service fees. They are considered part of the cost of using the plan’s features. If a $75 loan fee is taken from your 401(k), you’re using pre-tax money (which is nice in that you didn’t pay tax on that $75 initially), but you also can’t deduct $75 as an expense anywhere on your tax return. An employer typically wouldn’t cover these individual fees (since they stem from personal use of plan features), so it’s almost always the participant paying with plan assets – no extra deduction.

It’s also worth mentioning advisory fees or management fees in cases where you hire a financial advisor to help with your 401(k). Some people with large 401(k) balances hire an outside advisor or use a managed account feature that charges a fee. If that fee is paid out-of-pocket (not from the 401(k) itself), it falls under the category of investment advisory fees – which, as noted, are not deductible for individuals until at least 2026.

If such a fee is instead deducted from your 401(k) balance (some plans let an outside advisor’s fee be paid from the account directly), then it’s being paid with pre-tax dollars from the plan. In that scenario, you again wouldn’t have a personal deduction (and your 401(k) balance takes the hit directly).

Key concept: Paying investment fees from within a tax-deferred account means you avoid paying current tax on the fee amount, but you also relinquish the chance to ever deduct it. Paying fees out-of-pocket means you keep more in the account to grow, but you use after-tax dollars – and under current law you get no deduction for it.

There’s a trade-off: even without a deduction, some high net worth investors still pay fees out-of-pocket to maximize the untaxed growth in the account; others prefer to have the plan cover it with pre-tax money. It’s a financial decision, but just remember the IRS won’t give you a write-off either way right now (unless you’re in the employer role).

To put all this into perspective, here’s a summary table of 401(k) fee types and their tax treatment:

Note: “N/A” (not applicable) under employer deductibility means those fees are normally not paid by the employer at all, so the question of deducting them doesn’t arise. If an employer did choose to cover any of these on behalf of employees (an uncommon scenario, except maybe covering a financial counseling service), then the employer could likely deduct it.

In summary, all types of 401(k) fees ultimately come out of either pre-tax plan assets or an employer’s pocket. In neither case do they show up as a deductible expense on an individual’s tax return in the current tax environment. Knowing this, you might be wondering if there’s any relief at the state tax level. Indeed, some states give back what the federal law took away.

State-by-State Variations: Where 401(k) Fees May Be Tax-Deductible

While the IRS sets the rules for federal taxes, states have their own income tax laws – and they don’t always mirror federal changes. When the federal government disallowed miscellaneous deductions in 2018, some states decoupled from that rule. This means in certain states, you can still deduct investment-related expenses, including 401(k) or IRA fees, on your state income tax return even though you can’t on your federal return.

Here’s a breakdown of how different states handle 401(k) fee deductions on state taxes:

• States that Allow Deductions for 401(k)/Investment Fees: A handful of states continue to permit miscellaneous itemized deductions (or have similar mechanisms) for investment expenses. California and New York are two notable examples. California did not conform to the federal suspension of these deductions, so Californians who itemize on their state return can still claim investment advisor fees, IRA custodial fees, and other misc. deductions just like pre-2018 federal law.

• New York also explicitly decoupled from the TCJA changes – New Yorkers can itemize deductions for things like investment fees on their state Form IT-196, even if those aren’t allowed federally. Other states in this camp include Alabama, Arkansas, Hawaii, Maryland, Minnesota, and Pennsylvania, among others.

• Each of these states has rules that, in one way or another, preserve the ability to deduct unreimbursed employee expenses and investment expenses at the state level. For instance, Minnesota allows taxpayers to itemize on the state return regardless of federal itemization and includes investment expenses as deductible.

• Pennsylvania (which has a flat income tax) doesn’t use itemized deductions, but it has historically allowed certain investment costs to be offset against interest and dividend income as part of its income definitions. The key point is, in these states, you might get a partial tax break on your 401(k) fees at the state level. It won’t reduce your federal taxable income, but it could lower your state taxable income.

• States that Follow Federal (No Deduction): Many states automatically conform to federal tax law changes. In those states, when the federal deduction for investment fees vanished, the state deduction vanished too. For example, if you live in Illinois, Ohio, Georgia, or the majority of states that use federal taxable income or AGI as a starting point, you generally cannot deduct 401(k) fees on your state return either.

• These states adopted the TCJA changes or have no separate provision to add back those deductions. So for residents of these states, the tax treatment of 401(k) fees is a flat “no deduction, federal or state.”

• States with No Income Tax: It should be noted that if you live in a state with no state income tax (like Florida, Texas, Tennessee, Washington, and a few others), the question is moot at the state level – there’s simply no state income tax and thus no deductions to worry about. Your 401(k) fees won’t be deductible, but you’re not paying state tax on any income anyway.

To illustrate some key states, consider this table:

(Note: Tax laws can change, so always check your state’s latest rules or consult a tax professional. For example, some states changed conformity in recent years. The above is a general guide as of current laws.)

The practical upshot is that in a few states you might still salvage a tax benefit from your 401(k) fees. For instance, if you live in California and pay a financial advisor $1,000 to manage your retirement portfolio, you could include that $1,000 as an itemized deduction on your California return (subject to the old 2% AGI rule at the state level).

It won’t help on your federal 1040, but at a 9.3% California tax rate, that could save you about $93 in state tax. It’s not huge, but it’s not nothing. In New York, similarly, high-income residents often still track their investment fees for state itemized deductions.

By contrast, if you’re in a state that conforms to federal law, you won’t get any state deduction. For example, a taxpayer in Virginia or Colorado who pays 401(k) fees gets zero tax benefit federally and zero from the state. Knowing your state’s stance can at least set your expectations and help you decide if itemizing on the state return is worthwhile when federal itemizing might not be.

One more nuance: Employer deductions apply at the state level too. If a business can deduct plan fees federally, that usually flows through on the state corporate or income tax return as well.

States generally allow the same business expense deductions (since those come off the business’s net income). So any employer in any state gets the tax benefit for paying plan fees. The state variations really concern personal itemized deductions.

Now that we’ve covered federal and state angles and the types of fees, let’s talk about some pitfalls to avoid. Even though the rules are relatively straightforward, there are still common mistakes and misconceptions that can cost you.

Avoid These Common 401(k) Fee Tax Mistakes

Even savvy investors can slip up when it comes to 401(k) fees and taxes. Here are some common mistakes to avoid so you don’t pay more tax (or fees) than necessary:

• Attempting to deduct 401(k) fees on your federal return now: Don’t list your 401(k) management or advisory fees on Schedule A hoping for a break. The IRS eliminated that deduction through 2025. Claiming it will likely do nothing (if you use tax software, it won’t count) or could flag an error. Avoid this outdated strategy.

• Forgetting about state tax opportunities: Many people stopped tracking investment fees after 2018. But if you live in a state like CA, NY, or others that still allow those deductions, failing to claim them is leaving money on the table. Check your state’s rules and don’t miss a deduction you’re entitled to.

• Not leveraging employer deductions (if you’re a business owner): If you own a company and offer a 401(k), don’t pay plan fees out of personal funds or (worse) let them eat away at participant accounts without considering paying them yourself. Paying from the business account gives you a tax write-off and boosts your employees’ (and your own) retirement balances. Similarly, don’t forget to claim the retirement plan startup credit if your plan qualifies – it can offset 50% of eligible costs up to $5,000 per year.

• Confusing 401(k) contributions with fee deductions: Some savers mistakenly think, “I contribute to my 401(k) pre-tax, so any fees are automatically tax-deductible.” It’s true the contributions are pre-tax, and fees inside the account are effectively paid pre-tax too, but that’s not the same as getting a deduction on your tax return. Don’t conflate tax-deferred contributions with a separate deduction for fees. The former reduces your taxable income going in; the latter (currently) doesn’t exist.

• Ignoring the impact of fees because “they’re not deductible anyway”: A tax deduction isn’t the only reason to care about fees. Even though you can’t deduct your 401(k) fees as an individual, high fees still hurt you by shrinking your retirement savings. Don’t become complacent just because there’s no tax angle. Continuously monitor and try to reduce your 401(k) fees where possible – choose lower-cost investment options, advocate for your employer to review plan provider costs, or roll over old 401(k)s to lower-fee IRAs if appropriate. Over decades, saving 0.5% or 1% in fees can translate to tens of thousands of extra dollars in your account, which dwarfs any tax deduction you might have gotten.

• Paying 401(k) loan interest thinking it’s deductible: This is a specific misconception some have. If you borrow from your 401(k), you repay yourself with interest. That interest is not tax-deductible (unlike, say, mortgage interest). It’s really just a way of putting back more into your own account. Don’t treat 401(k) loan interest as a deductible expense on your taxes – it doesn’t qualify and isn’t even considered “interest” paid to a lender in the usual sense. (Similarly, fees you pay for a 401(k) loan or withdrawal aren’t deductible.)

Avoiding these mistakes will ensure you’re aligning with the law and optimizing what you can. Now, to wrap up, let’s address some frequently asked questions that pop up on forums and Reddit about 401(k) fees and taxes, in bite-sized answers.

FAQ: Quick Answers to Common Questions on 401(k) Fees and Tax Deductions

Are 401(k) management or administrative fees tax-deductible for me as an employee?

No. Under current federal law, you cannot deduct 401(k) management or administrative fees on your personal tax return if you’re an employee. Those deductions are suspended through at least 2025.

Can I deduct 401(k) fees on my tax return in 2024 or 2025?

No. For tax years 2024 and 2025, 401(k) fees are not deductible for individual taxpayers on federal returns. The tax reform law in 2017 eliminated that deduction until 2026.

Will investment fees be tax-deductible again after 2025?

Possibly. If Congress doesn’t change the law, the ability to deduct investment fees (including 401(k) fees) is scheduled to return in 2026. You would need to itemize deductions and meet the 2% income threshold.

Are 401(k) fees paid with pre-tax dollars automatically giving me a tax benefit?

Indirectly, yes. When fees are taken from your 401(k) (pre-tax money), you avoid paying current tax on that amount. But you do not get an additional tax deduction; the benefit is simply that the fee was paid with untaxed funds.

Can my business deduct the costs of running a 401(k) plan?

Yes. If you own a business, all ordinary 401(k) plan expenses you pay (administration, recordkeeping, advisor fees, etc.) are tax-deductible to the business. This reduces your business’s taxable income.

I’m self-employed with a Solo 401(k). How do I deduct plan fees?

If you pay Solo 401(k) fees from your business or personal funds, deduct them as a business expense on Schedule C (or your business tax return). They count as ordinary expenses of running your business.

Are IRA or Roth IRA fees tax-deductible like 401(k) fees?

Not for individuals right now. IRA custodian and management fees fell under the same miscellaneous deduction category, which is suspended federally until 2026. You can’t deduct IRA fees on your current federal return.

Is 401(k) loan interest tax-deductible?

No. Interest paid on a 401(k) loan is not tax-deductible. You’re paying that interest to your own account, not to a bank, so it doesn’t qualify as deductible interest.

Do 401(k) fees count toward my contribution limit?

No. Fees taken from your 401(k) do not count as contributions. They are separate from the contribution limits. However, they do reduce your account balance. Your annual contribution limit (e.g. $22,500 in 2023 for a 401(k)) is unaffected by fees.

Are there any tax credits related to 401(k) fees I can use?

For individuals, no direct credits for fees. For employers, yes – small businesses starting a new 401(k) plan can claim a federal tax credit (not just a deduction) to cover 50% of plan setup and administrative costs (up to $5,000 per year for three years, potentially more with auto-enrollment features). This helps offset fees for new plans.

Does paying 401(k) fees out-of-pocket help me in any way?

It won’t give you a tax deduction under current law. The only potential benefit is that your 401(k) account balance remains higher (since you didn’t deduct fees from it), allowing more tax-deferred growth. Some investors do this for the growth benefit, but it does mean paying fees with after-tax dollars and getting no immediate tax break.