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One of the factors that investors need to consider when investing in foreign stocks is taxes since it reduces the effective rate of return on an investment. Governments of most countries try to recoup millions in taxes from dividends that are paid to foreign investors by companies located in their countries. For example, when a U.S.-based investor invests in France Telecom (TEF) ADRs, the French government will deduct 25% in taxes on all dividends paid. Hence, though TEF currently has a 6.98% dividend yield, the actual yield that this investor receives will be less. However, the IRS allows a foreign tax credit (filed with IRS Form #1116) to be taken using which this investor can deduct the taxes paid to the French government. This is done to avoid double taxation of dividends. There is a maximum limit to this tax credit.

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The perennial question: is diversifying into non-US stocks and bonds worth the costs?

Which leads into the second question: do you KNOW the costs of your retirment portfolio? If you use individual stocks and bonds, these costs include: commissions, spreads, and taxes.

If one uses mutual funds or ETFs, one must include the expense ratio (ER), all taxes, and the "hidden costs" inside your mututal fund / ETF which include commissions, spreads, and impact costs.
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