Taxes of Global Stocks in IRA

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
saratmunjal
Posts: 3
Joined: Sat Aug 31, 2019 2:01 pm

Taxes of Global Stocks in IRA

Post by saratmunjal »

Do we end up paying taxes twice on foreign stocks in funds such as VMNVX and ETF such as VYMI if they are in an IRA portfolio? Income from account in CITI account in a foreign country deducts taxes at source but I get a 1099 and I get credit for those taxes in US. How does the system work for stocks from foreign countries in VG MF and ETF in a IR account?

Thanks
Silk McCue
Posts: 4806
Joined: Thu Feb 25, 2016 7:11 pm

Re: Taxes of Global Stocks in IRA

Post by Silk McCue »

Welcome to Bogleheads!

Taxes are only paid on withdrawals from IRA’s and are taxed at ordinary income rates regardless of the gains, losses, fees, taxes paid within the funds along the way.

Cheers
codedude
Posts: 69
Joined: Thu Jan 26, 2017 9:15 pm

Re: Taxes of Global Stocks in IRA

Post by codedude »

saratmunjal,

When foreign stock or funds are in an IRA or 401k or HSA, the taxes paid cannot be used to get a foreign tax credit on your tax return. They are lost.
Topic Author
saratmunjal
Posts: 3
Joined: Sat Aug 31, 2019 2:01 pm

Re: Taxes of Global Stocks in IRA

Post by saratmunjal »

That seems to be the disadvantage of MF and ETF in IRA, I will have to pay income tax on them at the time of withdrawal.
User avatar
abuss368
Posts: 21507
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Taxes of Global Stocks in IRA

Post by abuss368 »

saratmunjal wrote: Sat Aug 31, 2019 2:17 pm Do we end up paying taxes twice on foreign stocks in funds such as VMNVX and ETF such as VYMI if they are in an IRA portfolio? Income from account in CITI account in a foreign country deducts taxes at source but I get a 1099 and I get credit for those taxes in US. How does the system work for stocks from foreign countries in VG MF and ETF in a IR account?

Thanks
Unfortunately when holding international stocks in an IRA, the foreign tax credit is lost and can not be reported on a tax return.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
abuss368
Posts: 21507
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Taxes of Global Stocks in IRA

Post by abuss368 »

Generally speaking withdrawals (not counting non-deductible contributions) are taxable at ordinary income tax rates.
John C. Bogle: “Simplicity is the master key to financial success."
Geologist
Posts: 1507
Joined: Fri Jan 02, 2009 7:35 pm

Re: Taxes of Global Stocks in IRA

Post by Geologist »

saratmunjal wrote: Sat Aug 31, 2019 3:27 pm That seems to be the disadvantage of MF and ETF in IRA, I will have to pay income tax on them at the time of withdrawal.
I'm not sure what you mean. For mutual funds and ETF's in taxable accounts, you are very likely to have taxes to pay every year. The same investments in an IRA can grow in a tax-deferred manner for years.

For international stocks, you get a foreign tax credit in a taxable account, but you have to pay taxes on dividends (and capital gains, if there are any). The foreign tax credit is not some kind of free benefit.
Silk McCue
Posts: 4806
Joined: Thu Feb 25, 2016 7:11 pm

Re: Taxes of Global Stocks in IRA

Post by Silk McCue »

saratmunjal wrote: Sat Aug 31, 2019 3:27 pm That seems to be the disadvantage of MF and ETF in IRA, I will have to pay income tax on them at the time of withdrawal.
True, but hundreds of billions (if not more) of dollars of international funds are held in retirement accounts for their benefit of diversity. If you are able to hold yours in a taxable account then you can take advantage of the foreign tax credit. If you hold them in a Roth IRA you will never pay taxes on any of the growth. I for one never give it a second thought and hold international funds in retirement accounts.

Cheers
User avatar
grabiner
Advisory Board
Posts: 27920
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Taxes of Global Stocks in IRA

Post by grabiner »

It may help to view a $100K IRA as being $78K owned by you tax-free and $22K owned by the IRS, if you will withdraw the money in a 22% tax bracket. You get the tax-free returns on that $78K, just as if you held $78K in a Roth IRA.

In a Roth IRA you get single-taxed from withholding of dividends on foreign stocks, while all other investments are tax-exempt. If you view the traditional IRA the same way, you get tax-free growth on your share, and again you pay tax only on the foreign dividends. This makes it somewhat more attractive to hold US stocks in an IRA and foreign stocks in a taxable account; the foreign tax credit means that you only get single-taxed on the dividends.

Working the other way is that foreign stocks have higher yields and more non-qualified dividends. Therefore, it's usually close to break-even; US and foreign stocks gain about the same tax benefit from being held in an IRA.
Wiki David Grabiner
Topic Author
saratmunjal
Posts: 3
Joined: Sat Aug 31, 2019 2:01 pm

Re: Taxes of Global Stocks in IRA

Post by saratmunjal »

Thank you all - these were good thoughts. Even though there is some double taxation, diversity and higher dividend balances it to some extent.
User avatar
vineviz
Posts: 7797
Joined: Tue May 15, 2018 1:55 pm

Re: Taxes of Global Stocks in IRA

Post by vineviz »

Silk McCue wrote: Sat Aug 31, 2019 3:40 pmIf you are able to hold yours in a taxable account then you can take advantage of the foreign tax credit. If you hold them in a Roth IRA you will never pay taxes on any of the growth. I for one never give it a second thought and hold international funds in retirement accounts.
There should be a marginal benefit to holding international funds in a Traditional IRA over a Roth, since the foreign tax is deducted from the return.

Probably inconsequential for most investors, but it might be large enough to measure.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Post Reply