VXUS in an IRA: The ~0.2% a Year Your Dividend Never Gets Back

There's a warning that circulates wherever retirement savers gather: hold international stocks in an IRA and you throw away the foreign tax credit. It's true. And the part the warning usually skips is the size of the bill. On a $100,000 position in Vanguard Total International Stock ETF (VXUS), the credit you forfeit runs to roughly $180 or $200 every single year — money that leaves the account and never comes back. That deserves attention. But it is smaller, and the fix is different, than the headline suggests. Here's where the money actually goes.

Start with the income stream itself. VXUS holds thousands of companies across the developed and emerging world. Over the trailing twelve months it paid $2.19 per share in distributions, and with the shares recently trading near $87.50 that is about a 2.5% yield — a perfectly serviceable stream of income. The dividend you see, though, is the one that arrived after customs.

Most countries tax foreign investors at the border. When a company in France, Japan, or Switzerland pays its dividend, its government withholds a slice before the cash ever reaches Vanguard. By the time the distribution posts to your account, that slice is simply missing — recorded only as foreign taxes paid. In the 2025 tax year the amount skimmed was about 7.1% of the cash dividends VXUS paid, with the percentage running lower for developed-markets funds and over ten percent for emerging-markets funds.

In a taxable brokerage account, that withheld money is recoverable. Your broker reports the foreign tax on your 1099-DIV, and you claim it as a dollar-for-dollar credit against your US tax bill. If your foreign taxes are under $300 for a single filer, or $600 filing jointly, there isn't even an extra form to fill out; you just enter the number. That is the entire point of the foreign tax credit — to keep the same dividend from being taxed twice.

An IRA breaks that loop. Inside a traditional IRA, a Roth, or a 401(k), the dividend isn't taxed by the US, so there is no tax bill for the credit to offset, and the account never reports the foreign income you would need to claim it. Roth or traditional, the answer is identical: the roughly seven percent withheld is an expense that can't be recovered from any corner of the tax code. There is no clever wrapper that fixes it inside the account. The only lever is where the position sits.

Now scale it. Seven percent of a 2.5% yield is about 0.18% of your money a year — call it one-fifth of a percent. That's on the order of $180 to $200 a year for every $100,000 of VXUS held in an IRA, about $45 on a $25,000 starter position, and close to $1,000 on a $500,000 retirement stake. It appears on no statement, but it still compounds: $200 a year not reinvested, growing at six percent, becomes roughly $7,000 on that one $100,000 after twenty years.

And now the honest part, because taken alone the headline points the wrong direction. This is not a reason to sell VXUS, to stop funding an IRA, or to cram taxable accounts full of foreign stocks. Three things keep the leak in proportion.

First, the IRA is also saving you the US tax on those dividends — in most brackets a larger number than the credit you give up. The foreign tax credit becomes valuable through account location, not magic: international stocks in taxable, US stocks in the IRA, because a US fund's dividends get no offsetting credit while an international fund's do. Advisers who model the whole portfolio, citing Vanguard's research, put that complete advantage at roughly five to ten basis points of the portfolio a year. That is an optimization, not a fortune — worth setting up when you have room and a no-tax way to do it, not something to pay capital-gains tax to force.

Second, the credit is not free money in every situation. Only about six in ten VXUS dividend dollars are qualified dividends, where US funds run above ninety percent, and the credit can't touch the 3.8% net investment income tax or most state taxes. For high earners at the top rate, who also face a narrowing limit on how much of the credit they can actually use, sheltering international can come out ahead; the taxable-account case is really a middle- and upper-middle-income story.

Third, the one that should carry the most weight: if an IRA is all you have, hold VXUS there without guilt. One-fifth of a percent is a modest toll for owning a piece of the global economy, and international diversification inside an IRA beats no international at all. Don't contort a portfolio over $200 a year on $100,000.

One structural note catches people by surprise: a fund can pass foreign taxes through to shareholders only if more than half its assets sit in foreign stocks. A total-world ETF like VT, which is more than half US, doesn't qualify — so its holders aren't earning a credit to lose in the first place. If capturing the credit is the plan, use the dedicated international fund in the taxable account, not the blended one.

The working rule for an income portfolio is to read every yield net of what never reaches you. Inside an IRA, VXUS's real income yield is closer to 2.3% than 2.5% once the forfeited credit is counted, and that is the number to compare against your other income streams. Keep the leak where it can't be helped and remove it where it can: when you have taxable room, let the stream that recovers foreign tax earn there, and shelter the streams — bonds, REITs, the high-yield sleeves — that get nothing back anywhere. Small leaks dribble for forty years, so it's worth knowing exactly where each one is. It's just not worth letting any single one drive the car.