leftcoaster wrote: ↑Sun Jun 09, 2019 1:17 pm
vineviz wrote: ↑Sun Jun 09, 2019 10:38 am
leftcoaster wrote: ↑Sun Jun 09, 2019 10:03 am
I hold more international in taxable to capture the foreign tax credit. You won’t get this if you have international stocks in deferred accounts but you will pay those foreign taxes nonetheless.
Investors only completely lose out on the benefits foreign tax credit for international investments in tax-free
accounts (e.g. Roth IRA and Roth 401(k) plans).
the foreign withholding tax may be partially
offset through lower U.S. taxation upon withdrawal for many investors.
That doesn't make sense. Under no circumstances can you get a foreign tax credit for taxes paid inside a deferred account. You are throwing money away.
Here is the relevant section of the wiki which is very clear on this point:
The wiki may not address this particular point.
In taxable account, the foreign tax credit allows the investor to recoup the foreign tax in order to avoid double taxation, which happens because of foreign taxation AND US taxation on the same gross dividend income.
In a tax-deferred account, the foreign tax is withheld from the dividend income which lessens the dividend income amount and (therefore) the account balance. Because withdrawals from tax-deferred accounts are taxed at marginal US rates, the US tax bill is effectively reduced by the product of the foreign withholding and the marginal US tax rate. Essentially (even if not literally
), the US investor is getting a deduction for the foreign tax instead of a credit. Obviously, for most investors a deduction is much less valuable than a credit (which is why it probably make sense to locate international investments in taxable accounts if possible). But for any investor with a marginal US tax rate greater than zero when they make tax-deferred withdrawals, it's not worth nothing.
In a tax-free account (like a Roth) there is no equivalent offsetting effect at withdrawal, because there is not income taxation on the withdrawal.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch