Teachers: Top 5 Things to Know About Your Expat Tax Return and Retirement Plan

Expat Tax Return and Retirement Planning for Teachers

Moving overseas to bring your teaching talents to another country can be very appealing. After all, there’s no better way to become immersed into a new culture and have new experiences in your personal and professional life. There are many factors to consider before moving abroad to teach. For instance, you’ll need to think about retirement planning and how it affects your expat tax return. While this type of financial planning may not have been at the top of your list, it should be! Keep reading for the advice you need to know in order to preserve your future finances.

1. Understand the intricacies of foreign funds.

If you plan to invest in a foreign pension or retirement plan, you should be aware that the IRS typically does not consider these to be ‘qualified’ plans. Essentially, this means the money you put into the plan will not be tax deferred and your earnings are not tax exempt on your expat tax return. You may also face steep reporting requirements to the IRS.

Foreign mutual funds or a similar type of plan are considered to be a Passive Foreign Investment Company (PFIC), which have a fairly significant filing requirement that will cost you additional fees when filing your expat tax return. You’ll need to report income from the account on your taxes (even if you don’t withdraw any of it), and it can be taxed as high as 39% on your return – quite a high percentage!

2. Your money doesn’t have to be abroad, even though you are.

If you’re teaching overseas and decide you don’t want to invest in a foreign retirement plan, you may not have to. Your options for saving will depend on your particular situation.

One consideration is whether you are working for a US company. If so, and they offer a 401k plan, you won’t have to worry about foreign considerations – all contributions you make will be made before you’re taxed on your income and will be reflected on your W-2 at the end of the year.

Otherwise, if you have a foreign employer, there are a few options you can consider:

  • Contribute to an IRA – There are two forms: a traditional, which gives you a tax benefit in the year you contribute to the plan, and a ROTH IRA, which gives you a tax benefit in the year you take distributions from the account. You can contribute up to $5,500 total ($6,500 if you’re 50 or older) into your IRA accounts each year. There is a limit on the IRA deduction you take if you’re covered by a qualified retirement account at work (qualified does not include foreign retirement or pension accounts). If you don’t have a qualified retirement account, you won’t have a limit on what you can deduct from your expat tax return annually.
  • Set up an individual 401k – This can be done through a number of brokerage houses. You will be able to contribute up to $18,000 total ($24,000 if you’re 50 or older) per year. You are the ‘employee’ and ‘employer’ of this type of account, and all funds contributed to this account would be tax exempt. When you take distributions from the account, the principal and interest would be considered taxable income.
  • Contribute to a US mutual fund that invests in tax exempt municipal bonds or other tax exempt investments – This type of account may not give you an immediate tax advantage; however, when the bond matures, you will have tax exempt income.

3. Sometimes, you must contribute to a foreign fund.

The country in which you live may require you to contribute to a foreign retirement account due to it having a tax treaty with the US – there are several countries that require these mandatory contributions, including the United Kingdom, Australia and Switzerland.

4. Your choice of retirement plan will affect your expat tax return.

There are specific reporting requirements for foreign pensions and retirement accounts that you’ll need to be aware of. If the account is a PFIC, you’ll need to include Form 8621 with your US expat tax return. You will also need to report the accounts on your Foreign Bank Account Report (FBAR) and FATCA Form 8938. The amounts that you contribute and report on your US tax return will for a basis for you in the accounts, which will be considered ‘already taxed income’ – therefore being subtracted from any distributions you take from the account in the future.

5. There are more savings to be had.

Fortunately for US expats, there are a number of ways to save on your US expat taxes – one of the most popular being the Foreign Earned Income Exclusion (FEIE). This exclusion allows you to exclude up to $101,300 of your foreign earned income in 2016. If you happen to live and work in a country with little or no local taxes and a low cost of living, this can add up to big savings for you if you’re able to exclude all or most of your income from US taxes with the FEIE. If you’d like to learn more about all the ways to save on your expat taxes while living abroad, check out our guide for Americans working overseas.

Have Questions About Your US Expat Taxes or Retirement Accounts While Working Abroad?

Our team of expat-expert CPAs and IRS Enrolled Agents can help you with all of your US tax needs while you enjoy your adventures abroad. Contact us today!

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