Expert: Steven Taylor - 1/8/2010

Question
From one of your previous responses regarding foreign taxes on dividends, I now know that it's the U.S. that's taxing them, not the foreign country, itself. My question is, why don't they do that for all foreign stocks, not just those from select countries.  Also, because my stocks are all in an IRA, so I can't recoup foreign taxes paid, I'm trying to avoid buying any stocks with those taxes.  Can I find out which countries stocks are taxed and which aren't?  Thanks  

Answer
Janice, the actual withholding mechanism is based upon the tax treaties between the US and each country. It varies, and can also change from year-to-year. Also, it seems to vary by brokerage firm, which may be an oversight by individual firms, but still...

I do think you are doing the right thing by avoiding the purchase of any dividend paying foreign stock in a retirement account. Many countries allow for the refund of foreign taxes withheld in retirement accounts, but as of now, the United States does not. Foreign stocks offer some fantastic investment opportunities and are great for diversification, but you are better off investing in those stocks and funds outside your IRA.

I suggest you contact your individual brokerage firm for a list of countries and/or stocks on which they will be withholding for 2010.