IRA Rules

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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.

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

Different IRA Tax Rules apply depending on the type of IRA you have. Below are different IRA Tax Rules for different types of IRA plans. For IRA distribution tax rules, see Tax Rules For IRA Distribution.

Traditional IRA Tax Rules

A traditional IRA is any IRA that is neither a Roth IRA nor a SIMPLE IRA. Contributions to a Traditional IRA can be deductible, partially deductible, or nondeductible, depending on choice and AGI limitations. Any earnings on the contributions made to a Traditional IRA are not taxed until withdrawn.

Traditional IRAs distributions are reported on form 1099-R and the IRA box should be checked. IRA contributions are reported on lines 15a and 15b of the tax form 1040. Traditional IRA deductions are reported on line 32 of the form 1040 (IRA deduction). You may deduct Traditional IRA contributions on your tax return if you make them in that tax year or by the tax filing deadline (April 15) of the following tax year. Contributions do not have to be made before your tax return is filed. You may also file an amended return showing the contributions. See IRA Contribution Rules for requirements that you must meet to contribute to a Traditional IRA.

Roth IRAs

A Roth IRA is an individual retirement plan that generally is subject to the rules that apply to a Traditional IRA. Roth IRA distributions are reported on Form 1099-R in box 7 with:

• a “J” for early distributions,
• a “Q” for qualified distribution or
• a “T” for distributions where it may or may not be qualified but the recipient is age 59 1/2 or meets other exception to the 10% additional tax.

SIMPLE IRAs and SEP IRAs

SIMPLE IRAs are Savings Incentive Match Plans for Employees (SIMPLE) IRAs. Some employers offer their employee (including a self employed individual) the chance to contribute part of their pay, through salary reduction, to an IRA as part of a SIMPLE plan. The employee is not taxed on the contributions when they are paid into the IRA, but the distributions are generally fully taxable. In addition to the employee’s salary reduction contributions, the employer must make either matching or nonelective contributions.

SEP IRAs

SEP IRAs are Simplified Employee Plan (SEP) IRAs. Some employers offer this plan to thier employees. In many cases the contributions are not included in the employee’s income when paid into the SEP IRA. Distributions are fully taxable.

Retirement Savings Contribution Credit

Read more about the Retirement Savings Contribution Credit here.