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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 – if I have enough of an individual foreign stock in my Roth IRA that is putting out $1000 in annual dividends per year, I am worried about taxes from the foreign government on the $1000. For my country, taxes have already been paid going in, so dividends would accrue tax free going forward. So my $1000 stays at $1000. But if it is a French company like TOT, the French government might take out 50% and I would only have $500. Perhaps if it had been BP, the British government would have a more amenable agreement with the USA government, so that percentage would be much lower.

I understand that if those stocks were in my taxed account, and say my tax rate was 30%, then I could apply – I thought that was to the foreign government – for the difference from what was actually withheld, say 50%, and what my government would have withheld, say 30%. So I can get back the 20% with the application for taxed accounts. Now what about IRAs – both traditional and Roth?

Then I try to avoid the problem with ETFs and ask, assuming that either I will not be able to get back any kind of refund on foreign dividend taxes or just like you said – I won’t put foreign dividend producing stocks there in my IRA to begin with – what about the country-specific ETFs? If I put a country specific ETF in my IRA, the foreign country is not going to take tax out of the dividends from the ETF, correct? Now yes, maybe that foreign government has got its cut already through the ETF company, such as iShares, but it does two things, at least – eliminates the need for worrying about paperwork for refunds via the tax credit, and still gets me dividend-producing foreign exposure in the IRA.

The REIT and MLP question should have been done separately in another post, but this sentence of yours confused me a bit:

“IMO MLP's rarely present a problem in IRAs, but they also lose their tax-free cash cow aspect.”

All I could find on was an article from early 2013 called “An Investor’s Guide to Master Limited Partnerships.”

But I think your response on MLPs has left out some important information, so let me start with my assumptions: I want to start with a small position in an MLP and then build it up both with additional purchases of shares and by reinvesting dividends. My brokerage account can only be set to an “all reinvest dividends” or “all dividends to cash” mode. With those things in mind, I want to start building up, over a 20 or more year period, a large position in one or two MLPs. However I found out that after $3000 annually, MLP dividend income in Roth IRAs are taxed. That would kill the advantage of compounding, and at some later point I would not want to just sell out or reset the account to “dividends to cash” mode.

I am not sure now where the source of my information is, and if it applies to REITS or not. But this sort of information leads me to believe MLPs may be good for my taxed account, and just OK for my IRA as long as I accept the limitation above.

Thanks for your help and patience!

Rob (aka TempoAllegro)
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