Tax withheld in IRAs
We hear plenty about keeping our portfolios diversified. We should consider investing in other countries as well as the USA. Many of the folks I know have significant investments only in their 401(k) plans or in their IRAs. I have seen nobody inform investors of the likelihood of having tax withheld on dividends paid on foreign stocks held in IRAs, 401(k)s, etc. How does one recover the foreign tax withheld? Isn’t it lost?
Permalink Submitted by Alan - IRA critic on Mon, 2018-12-03 23:53
Yes, it is lost since a foreign tax credit cannot be claimed for retirement plan investments. However, if you drill down farther, the loss turns out to be very small. For example, for a non Roth IRA, the foreign tax withheld is pre tax money. And if you held the foreign investments in a taxable brokerage instead, the foreign tax credit is added to your 1099 DIV, so you have to pay US income tax on the amount of the FTC, although some of that would be at the lower Qualified DIv rate. Finally, there may be some countries such as Canada that are not supposed (but often do anyway) to withhold tax on IRA money under the tax treaties. The net loss would probably amount to roughly 25 basis points compared to holding the investments in taxable.