Are Annuity Fees Tax Deductible? Current Rules and Carve-Outs

Annuity fees are not tax deductible for individual owners on a federal return. Congress permanently eliminated the miscellaneous itemized deduction that once let taxpayers write off investment-related expenses, including the mortality and expense charges, administrative fees, rider costs, and subaccount management fees baked into annuity contracts. The ban applies to every tax year from 2018 forward with no expiration date.¹ A few narrow situations change the analysis, including annuities owned by businesses or trusts and a specific advisory-fee arrangement the IRS blessed in 2024, but the general answer for an individual contract owner is no.

Which Fees This Covers

Variable annuities carry several layers of internal charges. Mortality and expense risk fees often run around 1.25% of account value a year. Add administrative fees, subaccount investment management fees, and optional rider costs, and total annual expenses commonly land between 1% and 3% of contract value. Fixed and indexed annuities show lower explicit fees but bury costs in the crediting rate.

All of these are deducted internally by the insurer. You never write a check, and the deduction from your account value is not itself a taxable event. It is also not a deductible expense on your return.

Why the Deduction Is Gone, and Gone for Good

Before 2018, investment-related expenses could be claimed as miscellaneous itemized deductions on Schedule A, to the extent they exceeded 2% of adjusted gross income. The Tax Cuts and Jobs Act of 2017 suspended that deduction for tax years 2018 through 2025.²

In 2025, Congress made the suspension permanent by striking the sunset date out of the statute. Section 67(h) now reads that no miscellaneous itemized deduction is allowed for any tax year beginning after December 31, 2017, with no end date.¹ M&E charges, admin fees, subaccount fees, and rider costs on any individually owned annuity will not be deductible at the federal level again, qualified or non-qualified.

How This Plays Out in Different Contracts

Qualified Annuities in a Traditional IRA or 401(k)

Qualified annuities hold pre-tax money, and every dollar withdrawn eventually counts as ordinary income.³ You cannot deduct the fees separately because the money was never taxed going in.

There is an indirect benefit. Dollars the insurer takes in fees are dollars that will not appear in a future taxable distribution, so your eventual tax bill is smaller. The retirement plan deducts fees directly from the participant’s account balance.⁴ That is cold comfort, because you also have less money growing.

Roth IRA Annuities

Roth contributions are made with after-tax dollars, and qualified distributions come out tax-free. Fees reduce money you would have received without owing any tax. There is no offsetting tax savings later, and Roth annuity fees were never deductible in the first place: the tax code denies deductions for expenses incurred to produce tax-exempt income. Choosing a low-cost contract is the only defense.

Non-Qualified Annuities

Non-qualified annuities are purchased with after-tax money outside any retirement plan. Your cost basis equals the premiums you paid, and only the earnings grow tax-deferred. Distributions treat the earnings portion as ordinary income and the return of premiums as tax-free.³

Internal fees reduce the contract’s cash value, but your basis stays equal to total premiums paid regardless. Fees therefore drain earnings first, which trims the taxable gain you will eventually report. A modest silver lining, but not a deduction. You never claim the fees on your return.

The Advisory-Fee Carve-Out for Fee-Based Contracts

One narrow exception exists for non-qualified annuity owners who work with fee-based advisors. In 2024, the IRS issued a private letter ruling confirming that advisory fees deducted from a non-qualified annuity’s cash value and paid directly to an investment advisor are not treated as taxable distributions under Section 72(e).⁵ This is not a deduction. It means the fee payment itself does not trigger a tax bill, which otherwise would have been a real concern because withdrawals from non-qualified annuities are generally taxed on an earnings-first basis.

The conditions are strict. The advisory fee cannot exceed 1.5% of the contract’s cash value annually. It must compensate the advisor only for investment advice related to that specific annuity. The advisor cannot have received a commission on the sale of the contract. And the contract itself must pay the fee rather than the owner paying out of pocket.⁵ Private letter rulings formally bind only the taxpayer who requested them, but the IRS publishing this one signals how it views the arrangement.

The One Deduction That Survived: Unrecovered Investment

If an annuitant dies or annuity payments stop before the full cost basis has been recovered, the remaining unrecovered investment is deductible on the final tax return under Section 72(b)(3). That deduction is specifically excluded from the definition of “miscellaneous itemized deduction” by Section 67(b)(10), which is why the 2% floor never applied and why the permanent suspension does not reach it.¹

This typically comes up with life annuities. If you annuitize a contract, receive monthly payments that include a tax-free return of basis under the exclusion ratio, and then die before recovering the full investment, the unrecovered portion can be claimed on the decedent’s final return. It is not a fee deduction, but it is the closest the code comes to relief for annuity costs that were never recouped.

What You Can Actually Do About High Fees

Pay IRA Administrative Fees Out of Pocket

IRA owners can sometimes pay administrative and custodial fees from personal funds rather than letting the custodian deduct them from the account. A $200 fee paid externally preserves $200 of tax-deferred or tax-free growth inside the account. The external payment is not itself deductible.¹ It still tends to pay off for Roth owners because every dollar preserved comes out tax-free later; for traditional IRA owners it depends on the fee size and your time horizon. Investment management fees are usually deducted from the account itself and cannot be paid externally. The external-payment option generally applies only to administrative and custodial charges.

1035 Exchange to a Lower-Cost Contract

Section 1035 lets you exchange one annuity contract for another without recognizing gain or loss. Your cost basis carries over, and tax deferral continues.⁶ The exchange has to run directly from one insurance company to another. Take a cash distribution first and you have a taxable surrender followed by a new purchase, not an exchange. Watch for surrender charges on the old contract, which often decline over the first seven to ten years. If you are still inside that window, the charge can wipe out several years of fee savings on the new contract. Run the numbers first.

Check Your State Return

A handful of states still allow itemized deductions for investment-related expenses on state returns even though the federal deduction is gone. State tax codes do not always conform to federal changes. The specifics vary and change, so a state-specific question to a tax professional is worth asking if your annuity fees are significant.

Surrender Losses Are Now Stranded

Surrender a non-qualified annuity for less than your cost basis, and you have a loss. Internal fees, poor performance, and surrender charges can all produce this result. Historically the loss was deductible as a miscellaneous itemized deduction subject to the 2% floor. With the permanent elimination of those deductions, a surrender loss on a non-qualified annuity is no longer deductible at the federal level.¹ The loss is classified as ordinary rather than capital, so it cannot offset capital gains from stock sales either. You pay fees that drag your account below your investment, and the tax code offers no relief when you walk away.

When the Owner Is Not an Individual

Business-Owned Annuities

When a corporation owns an annuity for a legitimate business purpose, the analysis changes. Annuity fees can qualify as ordinary and necessary business expenses under Section 162.⁷ The business nexus has to be real. A contract funding a deferred compensation plan for executives has one; an annuity a business owner buys mainly for personal retirement savings does not. The IRS scrutinizes these arrangements, and the expense has to be reasonable in amount and genuinely tied to business operations.

Trust-Owned Annuities

Trusts report under fiduciary income tax rules on Form 1041. The permanent elimination of miscellaneous itemized deductions reaches trusts too. Under Section 67(e), a trust can still deduct administration costs that would not have been incurred if the property were not held in trust, such as trustee fees for fiduciary duties and trust tax return preparation. Investment management fees on an annuity held in a trust are a different category: an individual holding the same contract would face the same charges, so those fees are treated as miscellaneous itemized deductions and are not deductible for the trust either.⁸

1
Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
2
Internal Revenue Service. Publication 529 – Miscellaneous Deductions
3
Internal Revenue Service. Topic No. 410 – Pensions and Annuities
4
Internal Revenue Service. Retirement Topics – Fees
5
Internal Revenue Service. PLR 202431004
6
eCFR. 26 CFR 1.1035-1 – Certain Exchanges of Insurance Policies
7
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
8
Internal Revenue Service. Notice 2018-61 – Effect of Section 67(g) on Trusts and Estates