The other day as I was checking in on my investment accounts, I noticed something peculiar in my Roth IRA. If you aren’t familiar with what a Roth IRA is check out my post “IRA Basics.” Roth IRA’s are a tax exempt retirement vehicle where contributions to the account are made on a post-tax basis. Both capital gains and dividend payments in a Roth IRA are TAX FREE. Or are they?
My Roth IRA Had Been Taxed
One of my investments had paid me a dividend, but before it could make its way into my account someone lopped off about 20% of it for them self.
Before you get ahead of yourself and call your congressman let me explain: My Roth IRA contained shares of Royal Dutch Shell, a British-Dutch multinational oil company. I didn’t think much of the companies international status when I purchased my shares. It turns out that other countries don’t really care that my Roth IRA is supposed to be tax free when they have domain over the company paying the dividends.
There Is a Solution
In the case of Royal Dutch Shell (RDS) they have two share classes. A shares and B shares ( RDS.A, RDS,B). The only distinction between these shares being that A shares are taxed by the Dutch government while B shares are taxed by the US government. Of course, I had purchased A shares. By switching to B shares in this case my dividends would once again be tax-free.
Know Ahead Of Time
My goal in sharing this experience is not to steer anyone away from international equities. In fact, there are tons of attractive companies that aren’t based in the US. Instead, it is my hope that you will avoid these taxes altogether.
A quick google search concerning how the taxes are handled for whichever company you want to invest in should do the trick. It is also something worth checking on if you know you have international equity exposure but don’t pay attention to your accounts in much detail.
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