Where to Hold Foreign Stock

Comment on “Tap Into Tax-Related Information on Stocks and Funds,” by Charles Rotblut, CFA, in the December 2020 AAII Journal:

What are the considerations as to whether it is better to hold international equities in taxable versus tax-deferred accounts? It is my understanding that dividends for some international equities are nonqualified and are taxed as ordinary income. This suggests holding them in tax-deferred accounts. At the same time foreign income taxes are withheld on dividends paid by corporations located in certain countries. Foreign taxes withheld on dividend payments involving equities held in taxable accounts become tax deductible. No tax deduction is available for foreign taxes paid/withheld on equities held in tax-deferred accounts.
—J. M. from New Jersey

Charles Rotblut responds:
In an IRA or Roth IRA, dividends are not taxed, but you can’t claim a credit on foreign taxes paid.

For stocks held in a taxable account, depending on the country, the foreign dividends may or may not qualify for the reduced U.S. tax rate. Credits on foreign taxes paid may also be able to be claimed. See the IRS website (www.irs.gov) for more information.

The questions to yourself ask are: What tax rates will you pay in the U.S.? What tax rates will you pay to the foreign country? The answers may help you decide.

QCD Question

Comment on “17 Financial and Investing Moves for 2020,” by Charles Rotblut, CFA, in the December 2020 AAII Journal:

For those of us who don’t itemize, aren’t qualified charitable distributions (QCDs) a great tax savings, in that it is a nontaxable event? A non-QCD charitable donation would be effectively made with aftertax money if you don’t itemize (excluding, of course, the $300 special deduction for 2020). The article suggests that there is no tax benefit in 2020 since the required minimum distribution (RMD) is not required.
—Anthony T. from North Carolina

Charles Rotblut responds:
QCDs offset RMDs dollar-for-dollar up to the $100,000 limit. The offset reduces the amount of taxable income realized in a given calendar year. Because RMDs are suspended this year (2020), there is no offset. QCDs made this year will, however, reduce the dollar amount of future RMDs.

Sequence of Returns Scenarios

Comment on “Sequence Risk: Is It Really a Big Deal?” by AAII Staff, from the Dispatches in the December 2020 AAII Journal:

This article reflects the abstract view to this risk. As a pending retiree who must rely on these funds, there is a real psychological component to running out of money when you have no means (other than depending on the government or relatives) for survival. Seeing your retirement go down 30% to 40% will cause most people to panic. These real life reactions to this risk and how to avoid them should be the focus of the AAII.
—Ronaldo J. from Maryland

AAII Staff responds:
Please see the article “The Sequence in Which Returns Occur Affects Your Wealth” by Charles Rotblut, CFA, in the May 2015 AAII Journal, which goes through hypothetical scenarios. It’s linked on the right side of the Dispatch webpage as a related article.

Motivations for Working in Retirement

Comment on “Both Wage and Non-Wage Income Influence Retirees’ Willingness to Work,” by AAII Staff, from the Dispatches in the December 2020 AAII Journal:

I read the 29-page paper this was drawn from, and one flaw is that the hypotheses were only focused on income. What is missing is that humans are very difficult to analyze. I couldn’t determine if some were working not for the pay so much as for what they got out of it in non-monetary ways. A doctor often keeps working because they get tremendous satisfaction from helping. Same with other professions. Some teachers keep working because of the growth they see in their students. People may take a job as a store clerk just to be around people, even though it may be minimum wage.
—John G. from Michigan

Tax Updates

Correction: Revised life expectancy tables used to calculate RMDs will go into effect in 2022, not in 2021 as erroneously stated in the Tax Guide and the article on “17 Financial Moves.”

Update: Congress passed the Consolidated Appropriations Act of 2021 at the end of December, which authorizes new stimulus payments, extends more generous charitable deductions and renews the lower 7.5% floor for deducting medical expenses, among other things. The online version of the Tax Guide has been revised where the new rules apply to your taxes.