Foreign bond funds in Roth IRA

[Guest carrrottt09]

Hello all,

I posted a question on here once before and got several great helpful responses, so I return with a few questions that I am hoping I can get answered as no one else seems to be able or willing to help.

I am considering investing in FAX in my roth ira, a foreign bond fund that kicks off a fair amount of distributions each month. I had previously invested in AAV, which was a canadian trust, it was subject to the 15% withholding, which I was unable to reclaim as it was in a tax sheltered account...

My question is whether or not the FAX fund would be subject to this same 15% withholding, as it really takes a chunk out of the returns and the whole purpose of this particular investment.

Is there anything else I should be aware of regarding bond funds in my roth IRA that this question shows that I am unaware of?

Thanks so much.

Kind regards to all,

Kevin

[Guest mjb]

Hello all,

I posted a question on here once before and got several great helpful responses, so I return with a few questions that I am hoping I can get answered as no one else seems to be able or willing to help.

I am considering investing in FAX in my roth ira, a foreign bond fund that kicks off a fair amount of distributions each month. I had previously invested in AAV, which was a canadian trust, it was subject to the 15% withholding, which I was unable to reclaim as it was in a tax sheltered account...

My question is whether or not the FAX fund would be subject to this same 15% withholding, as it really takes a chunk out of the returns and the whole purpose of this particular investment.

Is there anything else I should be aware of regarding bond funds in my roth IRA that this question shows that I am unaware of?

Thanks so much.

Kind regards to all,

Kevin

How is anyone on this board supposed to know the answer? You need to contact the fund itself to find out the rules for taxation of foreign income.

[Guest carrrottt09]

I thought that perhaps someone might have this CEF or some similar CEF in their Roth.

[masteff]

Sorry, Carrot, but this board is primarily for persons who work with employee benefit plans. While there is discussion of IRAs and Roth IRAs, the type of question you're asking is unique to the type of investment (a foreign fund). It is beyond the scope of the normal questions dealt with here.

As suggested, call the fund company. I assume that FAX is the ticker symbol for it. That makes it the Aberdeen fund family. http://www.aberdeen-asset.com/

Also call your brokerage firm. They're the ones who are likely responsible for taking the withholding. A specialist there should likely be able to explain if you'd be subject to it and if there are any exceptions that would apply.

[John G]

Ah, come on guys. I know something about this stuff!

The 15% refers to special rules Canada imposed on some stocks based there. The greatest impact occurs with high dividend yield resource companies. This is a complicated story, that involves a political flip flop (aka broken promise), some unusual effective dates, and the accompanying confusion when a government makes poorly thought out decrees.

Generally, there should be virtually no overlap with a foreign bond fund. First, because you are talking bonds, not equities. Second, because there may be minimal overlap with Canada since foreign includes significant markets in Europe, asia, and the BRICs.

Some cautions are worth noting: (1) when you buy a mutual fund, you only get information on their historic holdings, (2) funds may be subject to drift, a term that refers to divergence from their committed investment focus, (3) in this highly uncertain period if we have learned anything it is "know what you are buying", which is extremely complicated when you introduce international instruments, and (4) your investments will have currency exchange risks which means that you can gain or lose just because of currency flucuations. If you are interested in this fund primarily because you are chasing high yields, you may find some nasty surprises. Much of the high yield instruments sport the exagerated yields because they have oversized risks.

The currency exchange issue can be more significant than a bond yield. I have a real estate LLP that invests in Europe. When it was initiated, the Euro was around 1.15. After the 4th capital call, the Euro went over 1.54 only to decline to the current 1.26. All of that "action" occurred in less than 2 years.

While I would certainly suggest that you talk to the funds management to better understand special tax treatments (such as other countries imposing taxes on foreign holdings), you probably will not get much advice on the currency exchange or underlying risks issues.

PS: The original post author has mentioned CEF - this stands for a closed end fund, which is a little different from a typical mutual fund.

[Guest carrrottt09]

John G,

Thanks. I was starting to feel like I had asked an inappropriate question somehow. I knew someone would have had experience with it.

Regards,

Kevin

[John G]

Well....what the accountants and attorneys suggested is true. Most of the folks who post here are some version of tax practitioners, rather than financial planners or investment advisors.

I would caution you against single source advise. You need a variety of perspectives on most investment choices.