Foreign tax paid on stock held in 401k account

Jan 20, 2009 4 Replies

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My interest 17 years ago

What's the tax implication when I withdraw from my 401K at retirement?

For example, assuming a foreign stock paid $100 dividend and the foreign government withheld $10 tax. If this stock is owned in my regular investment account, I will pay US tax on $100 then get credit for $10 foreign tax paid. But what will happen if this foreign stock is held in 401K? Will the 401K brokerage be required track all such details? (If so, I would image the information is very messy and almost impossible to verify when you retire)

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Steve Pope 17 years ago

There is no benefit, so far as I know. Similarly, you can hold tax-free munis, or state-tax-free Treasuries, in your 401(k) but you can never capture the tax free aspects. Or make any use of lower capital gains rates within the 401(k), etc.

Steve

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DF2 17 years ago

The good news is that it is not messy. The bad news is that the foreign tax paid by your IRA or 401k is not deductible nor does it give you any credit.

It is best to put that kind of investment in your non-tax-deferred account, if the tax total is substantial.

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Harlan Lunsford 17 years ago

What the other two posters have mentioned is what I call the Las Vegas Law of Taxes: "What happens in the 401k, stays in the 401k."

ChEAr$, Harlan Lunsford, EA n LA

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Paul Thomas, CPA 17 years ago

"My interest" wrote

Luckily you get the best of the best. Since you are taxed only on the distributions from the 401K, you get a full deduction for the foreign taxes paid - sorta - because you'll never include in your income the gross earnings of the 401K.

Real simply,

401K contributions = $5,000 Earnings = $500 Less foreign taxes paid out - 25 ----------------------------------------- Full distribution = $ 5475

Taxable income = $ 5475

You effectively get an above-the-line deduction.

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