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Financial Accounts & Investing Abroad
Most Americans have some trouble understanding the details of their individual retirement accounts (IRAs). If you move to a foreign country, IRA policies become even more complicated. To help make sense of this complex topic, here’s what you need to know about traditional and Roth IRAs for expats when making retirement contributions.
Yes. US citizens living overseas can maintain both traditional and Roth IRAs. However, there are restrictions on who can make contributions. This means that while you won’t have to dissolve or transfer your IRA assets while living abroad, you may not be able to add to them either.
Whether or not you can contribute to an IRA while living overseas depends on your income level and any deductions or exclusions you claim. As a quick overview:
For expats, the key factor is taxable income. All US citizens are required to file a US federal tax return and report their worldwide income, regardless of where they live. However, the IRS offers a variety of tax deductions and exclusions for Americans living abroad. As a result, many expats don’t end up owing any taxes.
If you have no taxable income after applying the dedications and exclusions available, you will not have any taxable income and thus be ineligible to contribute to a traditional or Roth IRA.
Let’s look at a couple of examples.
This is a simplified version of the IRA contribution rules for expats. The rules can vary widely depending on your financial details or the foreign country you live in. We recommend consulting an expat tax professional when determining your IRA eligibility.
Traditional IRAs and Roth IRAs have plenty of overlap, but they also have notable differences.
Can expats set up an IRA while living abroad? Yes! In fact, you can create either a traditional or Roth IRA. (Though the rules discussed above will dictate whether you can make contributions to either.)
If you already live overseas, we typically recommend choosing a US-based IRA rather than a foreign IRA. Foreign investments are taxed differently from US investments and come with heavier reporting requirements.
However, there are exceptions to the rule. An expat tax professional will be able to advise you on the best choice for your individual situation.
Rolling an existing US IRA into a foreign pension is possible in some cases, but it’s seldom easy. It’s often simpler to withdraw the funds from your IRA and open a new account in a foreign country. (However, if you own a traditional IRA, this can lead to steep penalties if you withdraw the funds before reaching the age of 59½.)
As mentioned above, your Modified Adjusted Gross Income (MAGI) must be below a certain threshold to make Roth IRA contributions. Thus, when determining whether you are eligible to contribute to a Roth IRA, you will need to calculate your MAGI.
Your MAGI is your gross adjusted income (AGI) plus any untaxed:
This means that even if you use expat tax exemptions or exclusions, your foreign income is still part of your MAGI. For example, if you use the FEIE to exclude a portion or all of your foreign income, that income will still count toward your MAGI.
If claiming the FEIE excludes all of your foreign-earned income from taxation, you won’t be eligible to make any IRA contributions. So, what are your options? Let’s take a look.
Firstly, you could choose not to claim the FEIE at all. You are not required to use the FEIE even if you qualify for it. However, if you have used the FEIE in the past, you will have to revoke your election to use it explicitly, and you will not be able to claim it again for five years.
Depending on your situation, you may be able to claim only a part of the FEIE. This depends on whether you qualify for the FEIE under the bona fide residence test or the physical presence test.
You are required to claim the entire FEIE amount available to you. It’s all or nothing. Since the bona fide residence test qualifies you for the FEIE for a full tax year, you must claim the full FEIE amount available for that year.
However, the physical presence test isn’t tied to any particular tax year. It applies to any 12-month period. If you time your trips to and from the US right, you could reduce the amount of FEIE you are eligible for in a given tax year. This would allow you to claim a smaller portion of the FEIE while still having taxable income left over to contribute to an expat IRA.
In some instances, even if you use the FEIE to exclude your foreign income, you may be able to convert some of your pre-tax funds into a Roth IRA without paying a dime. Consult an expat tax expert to see if this is an option for you.
If you are eligible to make contributions to a traditional or Roth IRA, there will be a maximum amount you are allowed to contribute each year. This amount is based on your income, filing status, and age. The IRS provides a table explaining how much you can contribute during the current tax year.
Have questions about traditional and Roth IRAs for expats? No problem! We have the answers you need. In fact, we can even help you meet your US tax obligations.
Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.