If you live in a high tax state, where you hold your foreign investments, esp those that pay non-qualified dividends, can harm or help you. For this tax sensitive client, who held the right investments in the right accounts (before he started working with us, kudos), the tax savings keep piling up year after year.

Here’s a simple example:

A client buys $100,000 of a diversified emerging markets index fund in their personal brokerage account.

Each year, the fund pays roughly $2,000 in annual dividends.

Of the $2,000 in annual dividends, ~30% ($600) are non-qualified, which means they will be taxed at the client’s highest combined Federal & State income tax rate. For a CA resident in the highest tax bracket, that rate is 54.1% (37% Fed + 3.8% Medicare Surtax + 13.3% CA state tax).

At that rate, the client will pay ~$325 in tax on the $600 in non-qualified dividends.

If the same client bought the emerging markets index fund in a Roth IRA account, they would avoid paying tax on those non-qualified dividends, essentially converting dividends that are taxed at the highest rates to tax-free income.

Pretty cool.

Foreign investing + high tax state = tax savings opportunity.

Disclaimer: For information purposes only and should not be interpreted as legal, tax or financial advice. Always consult your CPA/tax advisor/attorney (or reach out to us;) to discuss your specific situation. Past performance is no guarantee of future results.