Foreign tax in IRA

Well, it reduces the amount you can withdraw in retirement, so in that sense it reduces your taxes. Other than that, no. I know you think of your IRA as your money (I sure think that about mine), but technically it's a distinct tax-exempt entity. Thus, except in some strange circumstances, it has no tax liability against which it can apply the foreign tax credit.

-- Phil Marti Clarksburg, MD

It's an expense you have to eat as a tradeoff for receiving tax deferred treatment on the earnings of your IRA.

In general, for purposes of the U.S. tax system, foreign taxes are more or less treated in the same manner as other expenses (there are differences, e.g., the foreign tax credit). In other words, for purposes of U.S. tax law, foreign taxes are an "expense in the normal sense" except to the extent that the Code expressly provides different treatment. Thus, because the foreign tax paid by the fund in which the IRA is invested would be treated just like any other expense paid to earn tax-exempt income, namely, the expense is nondeductible. In the case of foreign taxes, they are also noncreditable. As was pointed out by others, the amount of foreign tax paid has the effect of reducing the amount that will ultimately be available for distribution to you, and to that extent, reduces the amount you will ultimately have to include in income as and when you receive distributions; thus, the foreign tax paid is taken into account for purposes of determining how much income you actually receive when you get a distribution. This result mirrors the result that would have occurred had you been required to include the income on your return for the year in which earned, and had taken a corresponding deduction for the foreign tax paid (note that this may be different if you were to instead take a foreign tax credit; however, the foreign tax credit is designed to offset double taxation in the year in which the income is included for US tax purposes, and since the income is earned by an IRA, you aren't taxed on that income in the year of receipt, so there are no double taxation issues being triggered).