Low dividend funds/ETF in IRAs (reason: foreign tax rules)

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Joined: Sat Jun 09, 2018 11:32 pm

Low dividend funds/ETF in IRAs (reason: foreign tax rules)

Post by k_r » Sat Jun 09, 2018 11:56 pm

I am posting this question here since it appears to affect quite a few US citizens living in India. I anticipate this becoming an issue for me fairly soon. (If the forum administrators believe this topic should be shifted to the Personal forum, I understand.)

I understand the logic of having low-dividend funds/ETFs in taxable accounts, and having higher dividend/income or value stocks in IRAs and tax-deferred accounts.
However, there are many US citizens (and, former US residents) who live in India. After two years in India ( > 182 days per year), they are considered Indian residents for tax purposes ("Resident and Ordinarily Resident" to use the specific language). The main issue is that accruals from dividends and interest income within US-based IRAs are taxable for such Indian residents and, because such accruals are not taxed in the US, there is no benefit from Double-Taxation Avoidance Agreement or foreign taxes paid.

Note that capital gain distributions by US-based mutual funds within the IRA are not taxed in India; however, if I sell any fund or ETF in the IRA that has appreciated in value then it is considered a realized tax gain within the IRA and hence is a taxable event in India. The tax rate in India very quickly hits 30 percent.

Note also that the distributions from the IRA are taxable in the USA, but are not taxable in India (because they are considered simply a deferred distribution). However, I will not be taking any distributions from the IRAs for at least another 10 years.

Hence, the need to have mutual funds or ETFs that (a) have no dividend or interest income distributions, and (b) one can hold for a long time.

What would be some fund or ETF options?
Thanks in advance for any suggestions.

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