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Subject:  Re: Using ETFs to get Foreign divs in IRAs Date:  6/1/2013  4:58 AM
Author:  TempoAllegro Number:  118653 of 123036

I do have some areas of confusion and thank you for being patient. I have a CPA handling my taxes because I have lived abroad for a number of years, and pay taxes here in this foreign country. Until recently I have not worried about filing in the USA because I would have needed to earn above 70k in US dollars for me to pay taxes in both countries. Incomes are lower here in Asia where I live, but so are expenses, so it has been a good deal.

I had assumed and been told that I could not open a Roth IRA because I was not physically present in the USA. This turned out to be untrue as my CPA said as long as I file, I can have the Roth, and since I intend to return to home sweet home one day I want to build up a nest egg via a Roth. I am about 20 to 25 years from retirement now.

Perhaps my confusing stemmed from not understanding to which government I was applying for the refund – the tax credit. I had assumed that if the USA had a tax treaty with a country such as Great Britain, and Britain had withheld taxes on my GSK, then I would be applying to Britain for the refund to get the difference between what I would have paid the US government and what I actually paid the British government. But after re-reading your response (and some of Publication 901) I see that I must be applying to the US government for the tax credit. Ah! Perhaps that is why you said:

“The reason for keeping foreign investments in a taxable account is that you can take advantage of the foreign tax credit. Since an IRA is a distinct tax-exempt legal entity, there's no tax to apply the credit to.”

Now, there are many reasons for keeping foreign investments besides the obvious – you think that company is well-run and will outperform other investment opportunities. Taking the example of NVS and EWL, we have excellent choices of a Swiss Pharma with a deep pipeline that also owns about one-third of Roche. EWL is a hit list of some excellent European companies, including both Novartis and Roche, but also Nestle, Syngenta, UBS, and Credit Suisse in its top ten. This also provides indirect exposure to the Swiss Franc, which has appreciated tremendously of late. As far as Switzerland is concerned, I think neither my regular brokerage account nor my Roth IRA is a “distinct tax-exempt legal entity.”

So I believe the foreign government gets its taxes before the dividends hit my account. If it is an individual company, I thought I might apply for the tax credit, but for the ETFs, I thought iShares or the managing company would have handled it, so dividends received are post tax credit. While I know I can apply for the tax credit in the taxed account, I am asking if it can be done as well in the Roth IRA. Since taxes have already been paid on any income going into a Roth, I do not want to lose anything else to taxes there or have to file paperwork I barely understand. For someone who has a traditional IRA they may accept it from the start.

To try to clarify –