Tad Borek wrote:

- quote -

Are the performance numbers over various periods given with 401(k)
statements typically nominal or tax-adjusted? Looking at my 401(k)
statement, it doesn't say. I would guess that these are nominal since
that would make fund performance look better?

-Will

Will Trice wrote:
- quote -

Will,
Just be sure to look at the nominal (not tax-adjusted) performance
figures for the fund and you should see accurate numbers.

The fund will report dividend income received (from the stocks/ADRs held
by the fund) on a net-of-tax basis. You can see this if you read through
a fund's financial statements. It will say something like "Note: net
dividends after $17,000,000 in foreign taxes withheld" or list the $17M
as a line item before showing the dividend income. It's the "net" figure
that is paid out to shareholders, and used when computing nominal yield
for the fund. Or should be, anyway.

But that's not true of the after-tax figures. Under the SEC guidelines
for reporting after-tax returns, if a foreign tax credit is distributed
out to mutual fund shareholders, the fund needs to adjust performance
figures for that (adding in the credit to the dividend and adjusting
that total for taxes paid, at the top bracket).

So for comparing IRA/401k fund alternatives be sure to look at pre-tax
figures if comparing yields.

And no, as an IRA/401k shareholder you won't see the actual credit,
because you don't get a 1099-DIV for a mutual fund held in a qualified
account (because you aren't taxed on that dividend income).

-Tad

Tad Borek wrote:
- quote -

Would this effect be invisible on the statements of a 401(k) investor in
foreign mutual funds since they would not receive the type of statement
Elle did? I take it that the lost withholding would not appear in the
past performance of the fund? But I think expenses incurred to avoid
the withholding, as described in the article that Elle cited, would? I
don't normally invest in foreign mutual funds, but I would not have
thought to check on the effect of foreign taxes in the prospectus...

-Will

Tad, yup, this is what the link I provided said as well.

Elle wrote:
- quote -

Elle, if the ADR was held in a taxable account, you'd have a foreign tax
credit on your federal tax return, up to the amount of US tax you would
have paid on that foreign income on which you paid foreign tax. This is
claimed on Form 1116 (if it's a small credit the form isn't required -
see the instructions). You can also claim it as an itemized deduction
but it's usually better as a credit.

If you hold the ADR in an IRA you aren't allowed to take that credit or
deduction because you didn't have taxable income associated with the
foreign tax paid. This is a down-side of holding ADRs in an IRA, though
on balance it might not be significant.

Incidentally this same foreign tax credit is the reason many
corporations pay minimal US taxes. Big oil, as an example.

-Tad

I hold Honda Motor Company ADR (symbol: HMC) stock in my
Roth IRA. When a dividend was paid recently, I noticed that
my Fidelity records showed a "Foreign Tax Paid" to the tune
of about 7% on the dividend. In other words, Fidelity took
this off the top of the dividend and presumably paid it to
some country (Japan?).

The 2003 article at
http://www.upenn.edu/researchatpenn/article.php?692&bus
notes that such taxes, at least back in 2003, shafts those
holding certain foreign-based companies' within their IRAs.
Evidently outside the IRA, there was or is a way around
avoiding this tax. The article elaborates.

By contrast, I think my HMC stock's dividends, if held in a
taxable account, are like REITs: They may not qualify for
the tax break given most other domestic stocks' dividends.

Before I go(ogle) blindly forward, has anyone some good
citations on this or other insight (based in experience with
foreign-based stocks)?