taxes on an IRA investment
I accidentally selected a foreign ADR (American
Depositary Receipt) stock for the loose change in my IRA, and then
Israel withheld 25 percent of the very dividends I selected it for.
Can I save my supporting paperwork and later claim a foreign tax
credit when I am withdrawing the taxed dividend? -- David
As you were shocked to find out, your tax-free individual retirement
account is all of a sudden paying taxes to a foreign country.
Since an IRA would not traditionally pay taxes, I
can't find anything in my research that says you can claim a credit
for taxes paid by the IRA. Since the funds are paid to the IRA net
of taxes, I don't see where you could later gross up the withdrawal
for the foreign taxes paid.
For example, if your IRA earned $100 in dividends,
it would have had $25 withheld for foreign taxes. The IRA would
then only have $75 available to pay you, which would be your withdrawal.
Since you're withdrawing the after-tax amount you couldn't claim
the $25 credit.
Alternatively, I don't believe you could say that
it was equivalent to a nondeductible IRA, since the U.S. tax may
have been higher. I don't think the ADR is an advisable investment
and you need to get rid of it.