IRA Rules

Posts Tagged ‘ira tax rules 2010’

Question: What are the tax implications for holding ADR stock in a Roth IRA?

I own stock of BP (British Petro) , AIB (Allied Irish Banks), and looking to pick up some E (Eni) which are/will be held in a U.S. Roth IRA account.

How will any future dividends or capital gains be handled since these are foreign stocks? Will they be tax free in conjunction with the rules of a Roth IRA?
@Mike – is there a way to see where a certain stock issued from? Like your RDS example?

Can this be done from a financial site like google finance or yahoo finance, or do you have to dig through the annual report?

Answer: There aren’t any.

Fist off, ADRs — American Depository Receipts — are not foreign stocks, they are US securities issued to cover an equivalent number of foreign securities held by a registered broker. Therefore there are no US implications on holding foreign securities.

US persons and entities, other than registered securities brokers, are generally prohibited from directly holding foreign securities. An American living in Europe for example, must certify that they are not US persons or entities in order to purchase securities from a European dealer. It’s a boilerplate clause in all European securities contracts and nobody checks up on it.

In reality it’s all done with a nod and a wink — I’ve owned foreign shares while living in Europe. I reported the gains on my US returns and paid any taxes due, and took credit for the foreign taxes paid using Form 1116. Thankfully the IRS isn’t permitted to report securities irregularities as long as the taxes are paid. That’s a moot point in your case because ADRs are not foreign securities and because you are holding them in an IRA.

If there are any foreign taxes on the underlying securities those are usually withheld at the source and you receive the net. Otherwise the foreign tax would be paid by the dealer and you again receive the net. However since these are held in a tax deferred account in your case, you cannot claim any credit for the foreign taxes paid. That’s negated by the fact that you receive the net gain after the foreign taxes so it’s largely a moot point.

Since these are US securities held within your IRA there are no tax consequences any more than with any other US security.

The IRA Tax Time Bomb

Question: Are you allowed to sell a stock in a tax advantaged account and immediately buy it back in a regular account?

I want to sell some stock in my Roth and recognize some capital gains. I also want to immediately buy the stock back in a regular brokerage account. Are there any rules against this? If not, seems like a great idea to lock in those gains in an account where you don’t pay any capital gains tax.

If you are allowed to do this, it seems like you can abuse it. Example: in illquid stocks with a wide bid-ask spread, one can sell and buy at the same time using one’s own tax-advantaged account and regular brokerage account-recognizing the gains in the IRA and the losses in the regular one.

Answer: There shouldn’t be any tax problem.

But why would you buy a stock EXPECTING a capital loss?

If you really expect the stock to go down don’t buy it. If you expect a down-turn in the market [in that stock or in the general market], go into cash or short term bonds that won’t get hit with capital losses.

Rule#4: Diversify! Diversify! Diversify!