A frequently asked question that I get from U.S expats is, can I contribute to an IRA as a U.S expat? Or maybe as an expat I have been told that I can’t contribute to an IRA is this true?
The article goes over the basics to debunk this myth and covers some information about IRAs (and Roths) to ultimately help US expats.
IRA’s and The Rules?
In its simplest form, an IRA is a retirement account that lets your wealth grow tax-free. Now, as far as contributing to it as an expat, it follows very similar rules as if you were in the U.S, that is the income has to be earned income. So, if you have employment as a U.S expat you are eligible to contribute to your IRA account.
This means that it doesn’t matter if it’s not going into your U.S bank account or sourced from overseas employment as long as it is earned income you are eligible.
The caveat comes as you do have some additional requirements to determine the deductibility of the contributions.
U.S expats are subject to FEIE, this is a provision that allows U.S expats to exclude up to $112,000 (current as of May 2022) per person of non-U.S. employment income from U.S taxes. Now, this is where the earned income comes into play for the IRA account. For the income to be deemed as earned income it must have been excluded under the FEIE.
Therefore, if U.S. expats use tax credits instead of using the full amount of FEIE then at least some of the income would be classified as earned and thus being eligible for an IRA. You are deemed eligible for an IRA as a U.S expat and it is based on how you report your foreign income, not where your income is sourced.
What about Roth IRAs?
This is where it gets a bit more complex as a Roth IRA can have limitations on your income level, it is depended on how much you can contribute if at all. If your income exceeds $144,000 (for single filers) or $229,000 (for married 2022) you will not be eligible to make Roth contributions.
Your ability to contribute to a Roth is, therefore, subject to 2 criteria:
- The existence of un-excluded employment income (as explained previously with the IRA), and also a total MAGI (including FEIE amounts) that does not exceed the income cut off.
- As a result, the income of a single filer using FEIE in full would need to fall within the narrow range above $112,000, but below $144,000 to qualify for a Roth contribution.
Is it a Good Idea to Contribute to an IRA When Abroad?
This isn’t a one size fits all question as many U.S expats have very different situations. Examples might be having a pension scheme in the country that you are living in that has DTA (Double Taxation Agreement) with the U.S, this might make more sense for you to contribute to this if you aim to retire in the country.
Another example would be for those living in the U.K. who do not qualify for an ISA (or the tax on it make it not feasible for U.S expats) but they can make SIPPs contributions and the SIPPs annual allowance of 40,000 GBP annual allowance is more than the $6000 (or $7000 if over 50) that you can contribute with after-tax dollars (or pounds) to your Roth IRA.
Finally, many U.S. expats due to FEIE don’t have a U.S. tax liability, therefore would not benefit from IRA contributions and as an extreme example could cause taxation due to lack of DTA with the U.S and the country that you are living in.
Taking these considerations in mind if you find yourself in a situation like this it might be worth speaking to a qualified advisor about your situation.
Please be aware that investing of any kind could mean that you can get back less capital than what you originally invested.
If you would like to ask any questions, please email me at info@investmentsforexpats.com.
