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).

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Ernie Klein <eckl...[at]pacbell.net> wrote:

- quote -

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

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"Ernie Klein" <ecklein[at]pacbell.net> wrote:

- quote -

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

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I probably know the answer to this but I will ask anyway.

I know that in an IRA you have to eat expenses as a tradeoff
to receive tax free (tax deferred) treatment on dividends
and capital gains, but what about investments in a stock in
a foreign country that pays $xx in dividends and subtracts
$yy in foreign tax paid. This is not an expense in the
normal sense but an actual tax that is being paid against
the dividends in a supposedly tax free account.

Is there any way to use that tax to either offset income
(non IRA) taxes or use it to reduce future taxes on the IRA
when distributions are taken?

My guess is no to both and I am simply SOL and shouldn't be
investing in foreign stocks in an IRA, but the possibility
of foreign tax just wasn't on my radar when the investment
was made.

--
-Ernie-

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