Foreign stock in IRA

[Boho]

I have an inherited IRA and a brokerage account, both with Fidelity. I want to be internationally diversified to some extent. Soon I'll be choosing my investments for both accounts. Should I go out of my way to keep foreign stocks, and even mutual funds with some foreign holdings, out of my IRA? I read the following here. What do you think?

"As is the case for foreign stock investors, mutual funds holding foreign stocks should not be held in an IRA or qualified plan. IRA or qualified plan investors who hold funds investing in foreign stocks will not receive a 1099 and will not even know what they missed out on...Investors who hold these issues in an IRA or qualified plan are realizing a lower after-tax return than if they placed them in a taxable account."

I haven't read anything like that anywhere else and I'm thinking it's a trade-off and sometimes it's good to have some foreign stock in an IRA. Maybe I should keep a mostly foreign mutual fund in the regular brokerage account and not worry about a moderately low percentage of foreign holdings in the IRA.

 

[LOL!]

I have investments (ETFs, mutual funds) in my IRAs and 401(k) categorized as foreign funds. Yes, these funds pay foreign taxes, but so what?

I also have similar funds in my taxable accounts and I get a tax credit for the foreign taxes I pay to the extent that I would be double taxed by paying both US and foreign taxes.

The foreign taxes are not large --- amounting to about 7% on dividends, but nothing on capital gains.

Your linked article has:

Investors will not necessarily benefit from placing their foreign stocks or stock funds in their taxable accounts, but it cannot hurt.

One reason for this is that most foreign funds do not have more than about 75% qualified dividends, while many US funds have 100% qualified dividend income. That leads to more US taxes than foreign taxes for foreign funds held in a taxable account.

People have done calculations that show that the foreign tax credit for most US investors is really not a big deal. The bogleheads even have a calculator to show that. In essence, most people do NOT receive a lower after-tax return. This is especially true if such investments are held in a Roth IRA.

Here is the link to the bogleheads relative tax-efficiency discussion: https://www.bogleheads.org/forum/viewtopic.php?t=208818 but it may be too much detail for a novice to understand.

Bottom line: It doesn't matter that much where one puts tax efficient index funds when it comes to the foreign tax credit.