Message Font: Serif | Sans-Serif
 
No. of Recommendations: 1
I've begun assembling a list of II stocks for inclusion in an IRA. Some recommendations involve foreign companies such as VE that withhold foreign taxes on the dividends.

As there is no way to recapture this withholding in an IRA through the use of a tax credit, my question is this: which II stocks would specifically not be recommended for a retirement account?

I have already purchased some shares in VE, and perhaps the potential upside in the share price and the sizable dividend outweigh the 15% haircut on the payout.

But there are some other foreign companies -- as well as some MLPs, I think -- among the recs. Which should I stay away from for my IRA?

Thanks, Paps
Print the post Back To Top
No. of Recommendations: 0
apologies for bursting into bold type. forgot the close command.

Paps
Print the post Back To Top
No. of Recommendations: 1
Paps,

Quick note: in the IRAs and pension trust accounts I manage, there's a 25% (not 15%) foreign withholding tax for French securities. 15% is for after-tax accounts. And I think the withholding rate is 20% in retirement accounts for Spanish ADRs vs. 19% after-tax accounts (might have to double check).

So I make a decision to buy or not based upon the after-withholding tax yields of securities. E.g., I liked the reward:risk of buying VE at $10.50/share or below. Assuming the Euro 0.7 annual dividend (recent management guidance) x 0.75 (25% withholding) x a bearish 1.20 USD exchange rate, you get a 6% yield and the potential for pretty decent capital gains over 5-10 years given James' valuation. And if the Euro stays more firm over time, that yield goes up in USD terms.

Sorry I don't have and can't give any specific guidance on which to avoid for your IRA! Though I'll note that REITs and "regular" corporations tend to be popular in retirement accounts. Murph, Ralph, and/or David might be able to provide more color for you.

Best,

Scott
Coverage Fool, Income Investor
(Long VE)
Print the post Back To Top
No. of Recommendations: 1
Hey Paps!

Generally, you don't want to put MLPs in an IRA because MLPs already of tax advantages outside of IRAs and those benefits are actually lost an MLP is placed in an IRA. Also, IIRC, the U.S. foreign tax credit for foreign taxes withheld on foreign dividends cannot be taken if the foreign stock is placed in an IRA.

That said, generally REITs are excellent candidates for an IRA as well as trust preferred stocks, neither of which are entitled to the low 15% tax rate for most dividends.

David, who is NOT a tax expert.
II Home Fool
Print the post Back To Top
No. of Recommendations: 0
I posted: MLPs already of tax advantages which should have read: MLPs already have tax advantages

David
Print the post Back To Top
No. of Recommendations: 0
Thanks Scott,

I think I will steer clear of TOT for sure, in that case.

I notice that Chile also imposes a hefty 35% tax, which makes me less inclined to consider PVD as an IRA investment. And Indonesia imposes a 20% tax, making TLK a little less attractive.

VE and FTE, both based in France, have such high yields and depressed share prices that they still seem attractive despite the tax withholding.

I appreciate the clarification and insights.

Paps
Print the post Back To Top
No. of Recommendations: 0
VE and FTE, both based in France, have such high yields and depressed share prices that they still seem attractive despite the tax withholding.

I concur, Paps. But bear in mind that VE's dividend is not the TTM one reported on most investment sites (~12+%), but will rather likely be cut once declared by the board to the €0.70 target announced at the Dec. 6, 2011 Investor Day.

Also, the foreign withholding tax is recoverable, as David noted, for after-tax accounts, but not for retirement accounts. That's why I was stressing that for IRAs and pension accounts I just focus on the net-of-FW-tax yield.

On the issue of MLPs, this recent post of aleax's on the STON board might be of interest to you: http://boards.fool.com/1048/why-are-you-holding-ston-in-your...

Scott
Coverage Fool, II
Print the post Back To Top
No. of Recommendations: 0
Thanks everyone for all the great information. Learned a lot, especially in regard to the tax consequences of MLPs.

I'm not sure if the individual recs involving Limited Partnerships and foreign stocks include cautions about holding them in retirement accounts. I'll have to go back and check. But it would be useful information to have.

Thanks again for all the input. I appreciate it.

Paps
Print the post Back To Top