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Where should I hold international stock funds for the best tax outcome?

It's nuanced. International stock funds often pay foreign taxes on their dividends, and if you hold the fund in a taxable brokerage account you can claim the foreign tax credit to recover those taxes on your return. Hold the same fund inside an IRA or 401(k) and that foreign tax credit is lost, because there's no U.S. tax on the sheltered income to offset. That argues for keeping broad international index funds in taxable when possible. On the other hand, international funds sometimes distribute more ordinary (non-qualified) dividends, which cuts the other way. For most investors the foreign tax credit tips the balance toward taxable, but the effect is modest, so don't upend your allocation over it.

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