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Foreign Taxes paid from Foreign Index fund in 401K

Posted: Fri Jun 22, 2018 11:36 pm
by sksbog
Hello Bogleheads,

As you all know, if we have foreign taxes paid via foreign funds in taxable account, we can take foreign tax credits.
Similarly, is this possible for retirement accounts? Can we take credit of foreign tax paid, when we start paying taxes on the withdrawal during retirement?

Thanks

Re: Foreign Taxes paid from Foreign Index fund in 401K

Posted: Sat Jun 23, 2018 12:08 am
by Tanelorn
No, no tax credit or deduction. If it's your IRA, you could in theory file a foreign tax return to try to reclaim those lost withholdings, but in practice that's not going to be worth it but you could do it if you really wanted. Good luck getting your 401k custodian to do all that work themselves to get the trust to file foreign tax returns - that's never going to happen.

Don't hold foreign stock in your retirement account, or if you do, assume the taxes are a total loss.

Re: Foreign Taxes paid from Foreign Index fund in 401K

Posted: Sat Jun 23, 2018 12:20 am
by celia
There is no U.S. tax benefit on foreign taxes paid when the asset paying those taxes is in a tax-sheltered account. But if you withdraw shares of that fund in-kind (meaning you withdraw the shares themselves instead of selling them and withdrawing the cash), after those shares (of an international fund) go into a taxable account, you can then benefit on the foreign taxes paid when you file your tax return. If you withdraw cash instead, you can buy the fund back in the taxable account. (If you don't yet own the same fund in taxable, you need to invest more than the minimum needed to buy into a new fund.)

Benefiting from international funds paying foreign taxes when held in your taxable account is the primary reason they should be in a taxable account. If you haven't seen the wiki page on Tax-efficient Fund Placement, you might want to understand why it is best to hold different assets in different types of accounts.

Re: Foreign Taxes paid from Foreign Index fund in 401K

Posted: Sat Jun 23, 2018 12:36 am
by PFInterest
sksbog wrote:
Fri Jun 22, 2018 11:36 pm
Hello Bogleheads,

As you all know, if we have foreign taxes paid via foreign funds in taxable account, we can take foreign tax credits.
Similarly, is this possible for retirement accounts? Can we take credit of foreign tax paid, when we start paying taxes on the withdrawal during retirement?

Thanks
Nope.

Re: Foreign Taxes paid from Foreign Index fund in 401K

Posted: Sat Jun 23, 2018 4:58 am
by fujiters
celia wrote:
Sat Jun 23, 2018 12:20 am
There is no U.S. tax benefit on foreign taxes paid when the asset paying those taxes is in a tax-sheltered account. But if you withdraw shares of that fund in-kind (meaning you withdraw the shares themselves instead of selling them and withdrawing the cash), after those shares (of an international fund) go into a taxable account, you can then benefit on the foreign taxes paid when you file your tax return. If you withdraw cash instead, you can buy the fund back in the taxable account. (If you don't yet own the same fund in taxable, you need to invest more than the minimum needed to buy into a new fund.)

Benefiting from international funds paying foreign taxes when held in your taxable account is the primary reason they should be in a taxable account. If you haven't seen the wiki page on Tax-efficient Fund Placement, you might want to understand why it is best to hold different assets in different types of accounts.
Triceratop's been compiling a yearly spreadsheet showing the relative tax cost to holding various funds in a taxable account. In recent years, holding US indexes in taxable has been better for people in mid/high tax brackets, even after accounting for the foreign tax credit. This is due to the fact that foreign stocks have had higher dividend yields, ~3.4% to the US market's ~2% (cue concerns about valuations in the US market).

Re: Foreign Taxes paid from Foreign Index fund in 401K

Posted: Sat Jun 23, 2018 2:43 pm
by grabiner
celia wrote:
Sat Jun 23, 2018 12:20 am
Benefiting from international funds paying foreign taxes when held in your taxable account is the primary reason they should be in a taxable account. If you haven't seen the wiki page on Tax-efficient Fund Placement, you might want to understand why it is best to hold different assets in different types of accounts.
However, the higher yields and lower qualified dividends have made it pretty much a wash in recent years.

The primary decision of whether to hold US or foreign stock in taxable versus 401(k) should be based on the quality of the US and foreign investments; if your 401(k) has a low-cost S&P 500 index and a high-cost international fund, you should hold US stock there.