Individual Retirement Accounts
Published on December 06, 2022
Updated on November 06, 2024
by Deborshi Choudhury, EA
Deborshi Choudhury, an IRS Enrolled Agent with 17 years of expat tax experience, specializes in U.S. tax preparation, tax planning, and tax advice for U.S. citizens and Green Card holders living and working in the UAE and Canada.
Table of Contents
What is an Individual Retirement Account?
An Individual Retirement Account or IRA is a savings account with tax benefits geared towards an individual’s retirement. Normally, an individual contributes funds to a savings account for a specific amount of time until reaching a certain age and can take withdrawals.
There are two main types of IRA with different variations: A Traditional IRA and a Roth IRA. Each type varies on tax obligations to cater to an individual’s needs and lifestyle.
What is a Traditional IRA?
Traditional IRA contributions are made with pre-tax dollars, so the money will grow tax-deferred. The contributions are taxed when withdrawn annually for as early as 59 ½ years old.
Opening a Traditional IRA has no income limitations so anyone can contribute regardless of income level. Traditional IRAs are often recommended for individuals who expect to be in lower tax brackets at retirement than they are currently in.
What is a Roth IRA?
Contributions to a Roth IRA are made with post-tax dollars. This means that the balance in the Roth IRA grows tax-free, and withdrawals after the age of 59 ½ are also tax-free.
Generally, the IRS announces the contribution limits and eligibility criteria for Roth IRAs for the upcoming tax year during the fourth quarter of the current year. The limits are based on your modified adjusted gross income (MAGI) and tax-filing status.
For the year 2024:
|
Filing status |
Modified adjusted gross income |
Contribution limit |
|
Single Head of household, or Married filing separately |
Less than US$146,000 |
US$7,000 US$8,000 if age 50 or older |
|
US$146,000 to US$161,000 |
Partial contribution |
|
|
More than US$161,000 |
Ineligible for Roth IRA |
|
|
Married filing jointly |
Less than US$230,000 |
US$7,000 US$8,000 if age 50 or older |
|
US$230,000 to US$240,000 |
Partial contribution |
|
|
More than US$240,000 |
Ineligible for Roth IRA |
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Where can I open an IRA?
You can open an IRA through a bank, an investment company, an online brokerage, a credit union, or a personal broker.
Every place differs in fees, services, and other investment options, so it’s best to ensure that it aligns with your retirement goals.
Can I contribute to an IRA while living abroad?
Yes, you can contribute to an IRA if you have US-taxable income. However, you may not be able to contribute to an IRA account if all of your income is excluded from US taxation under the Foreign Earned Income Exclusion (FEIE) and the Foreign Housing Exclusion (FHE).
Foreign Earned Income Exclusion (FEIE) for the year 2024:
|
Filing status |
Maximum FEIE amount |
|
Single Married filing separately |
US$126,500 |
|
Married filing jointly |
US$253,000 |
Based on your FEIE amount, the foreign housing exclusion amount can further reduce your US taxable income. So, as long as you have enough earned income that exceeds the FEIE and FHE, you can contribute to an IRA while living abroad.
Can I contribute to an IRA as a US government employee abroad?
Yes, US government employees working overseas are not eligible to claim the FEIE. If you wish to contribute to a Roth IRA, it may be wise to claim the Foreign Tax Credit (FTC) instead of the Foreign Earned Income Exclusion.
The Foreign Tax Credit offers you a refund on your US taxes for any foreign taxes paid to avoid double taxation. The FTC reduces your overall tax liability but does not affect your taxable income base as the FEIE does. This means you would have a higher US taxable income and a greater ability to contribute to your IRA.
Can I open an IRA account while living abroad?
Yes, US citizens and permanent residents abroad can open an IRA. It is generally recommended to choose a US-based IRA over a foreign-based one. This is because you are still paying US taxes on your income, and foreign-based investments usually come with higher taxes and more complicated regulations.
Can I transfer my Roth IRA to a foreign pension account?
Transferring a Roth IRA directly to a foreign pension account is generally not allowed, as IRA rollovers can typically only be transferred between US accounts.
Another option is to withdraw all your money from your Roth IRA and open a brand-new foreign account to deposit your money in. However, if you are less than 59½, you will still bear some tax penalty for withdrawing the money.
While the money you withdraw from a Roth IRA is not taxable when withdrawn, any investment growth that your money has earned is taxable when withdrawn if you are less than retirement age.
Can I make early withdrawals from my IRA?
Yes, you can, but you might be subject to an early withdrawal penalty.
Traditional IRA
Withdrawing money from a traditional IRA before you reach age 59½ is called an early distribution. Generally, if you’re under 59½, you’ll have to pay a 10% penalty tax on the amount you withdraw.
Roth IRA
Because you’ve already paid taxes on your Roth IRA contributions, you can withdraw those contributions at any time without penalty. However, when it comes to withdrawing earnings, you face certain restrictions.
Withdrawing earnings tax-free will be available when you reach age 59½, and even then, the Roth IRA five-year rule applies: you must have held the account for at least five years since your first contribution. If you withdraw earnings before meeting the age and the five-year requirements, the earnings may be subject to taxes and a 10% early-withdrawal penalty.
Will my IRA contributions be taxed overseas?
Traditional IRAs
The tax treatment of your contribution depends on your local tax laws. Some countries will recognize that this money is tax-deductible.
Switzerland, for example, has an agreement with the United States that traditional IRA contributions can reduce your US and Swiss taxable income. In this scenario, it would be highly advantageous for you to contribute to a traditional IRA, resulting in a lower tax liability for both your US and Swiss taxes.
However, other countries do not recognize this tax deduction, and your traditional IRA contribution would still be counted as taxable income.
Roth IRAs
Since Roth IRAs are funded with post-tax dollars, contributing abroad will have less impact on the tax treatment but will be more pertinent for US citizens abroad who wish to withdraw.
You can check with your local country host for a tax treaty with the US to avoid double taxation. The host will recognize Roth IRA withdrawals as tax-free income. This is ideal, as your money was already taxed in the US before it went into the Roth; you don’t want it to be taxed coming out of your country of residence.
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