Individual Retirement Accounts
Individual Retirement Accounts for American Expats
As more and more Americans choose to live, work, or retire overseas, managing their US investment interests can become a challenge. While Americans living domestically can easily manage their retirement planning, those living and working abroad can find it difficult to balance US and foreign tax structures to earn the greatest benefit. Saving for retirement with a traditional or Roth IRA may still make financial sense for you, so read on. Consult with a tax advisor who has expertise in managing expat finance and tax before making your final decision.
Roth IRA Guidelines
Contributions to a Roth IRA are made with post-tax dollars. This means that the balance in your Roth IRA grows tax-free, and withdrawals after the age of 59 ½ are also tax-free.
You may contribute to a Roth IRA if your adjusted gross income for tax purposes is less than $144,000 for individuals or $214,000 for married filing jointly in 2022. For 2023, those income limits will rise to $153,000 for individuals and $228,000 for couples.
For 2022, you can contribute the lesser of your taxable income or $6,000 per year to a Roth IRA account, with an additional $1,000 allowed contribution if you are over 50. For 2023, the limit will increase to $6,500 for the year, while the additional contribution for individuals over 50 will remain $1,000. Households with a non-working spouse may also use a spousal IRA, and contribute an additional $6,000 for the nonworking spouse.
Traditional IRA Guidelines
A traditional IRA receives the opposite tax treatment than a Roth IRA. Traditional IRA contributions are made with pre-tax dollars, and the contributions are then taxed when withdrawn during retirement after 59 ½.
The contribution limit is the same for a traditional IRA as for a Roth IRA. You can contribute the lesser of $6,000 or your taxable income for the year in 2022, increasing to $6,500 in 2023.
Since traditional IRA contributions are made with pre-tax dollars, money you invest in a traditional IRA is tax-deductible for most Americans. If you make the full contribution of $6,000, that amount is deductible from your taxable income. However, if your income is above $68,000 for individuals, or $109,000 for married filing jointly, your tax deduction begins to phase out. If you earn more than $78,000 as an individual, or $129,000 for married filing jointly, you cannot claim any tax deduction at all on your traditional IRA contributions.
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Can I contribute to an IRA while living abroad?
The short answer? Yes, you can. However, you have to have US taxable income in order to contribute to an IRA. If all of your income is excluded from US taxation under the Foreign Earned Income exclusion and the Foreign Housing Exclusion, you may not contribute to an IRA account.
The Foreign Earned Income Exclusion (FEIE) allows you to exclude up to $112,000 of earned income for individuals or $224,000 for couples from your US taxable income. This amount will increase to $120,000 per person in 2023. The foreign housing exclusion (FHE) amount, which is based off your FEIE amount, can further reduce your US taxable income. If you work and live abroad and meet the qualifications for the FEIE and FHE, you probably will not have much US taxable income left. In the event that you do, the income in excess of the FEIE would be able to be counted for Roth IRA contributions.
If you are a US government employee working overseas or are employed on a foreign US military base in certain capacities, you are not eligible to claim the FEIE.
If you wish to contribute to a Roth IRA, it may be smart for you 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, in order to avoid double taxation. This is available to more Americans living abroad than those who qualify for the FEIE. The FTC reduces your overall tax liability but does not affect your taxable income base as the FEIE does. This means that you would have a higher US taxable income, and therefore a greater ability to contribute to your IRA.
Another consideration that you may have, especially if you have a high income, is whether you should contribute to an IRA, even if you can. Different countries have domestic taxation levels, tax incentives, or tax treaties with the United States that make contributing to a US-based investment account more or less attractive. Consult with an expat tax professional about your specific country of residence and financial goals.
Can I open an IRA account while living abroad?
Yes, you can. Generally, even if you are living overseas, you will still want 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?
This may be difficult. IRA rollovers are generally only able to be transferred between US accounts, and you will probably run into trouble switching your money over to a foreign pension plan.
If you are determined to do it, one way to do it would be 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 account is not taxable when withdrawn, any investment growth that your money has earned is taxable when withdrawn if you are less than retirement age. Due to the tax penalty, withdrawing your money early is generally not a good option.
Will my IRA contributions be taxed overseas?
This can be looked at through the lens of traditional and Roth IRAs, and the answer to this question is highly dependent on your foreign country of residence.
- Traditional IRAs: 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 both your US and your Swiss taxable income. In this scenario, it would be highly advantageous for you to contribute to a traditional IRA, as it would result in a lower tax liability for both your US and Swiss taxes.
Other countries, such as Germany, do not recognize this tax deduction, and your traditional IRA contribution would still be counted as taxable income in Germany. This is clearly not a good situation to contribute to a traditional IRA, as your contributions would be taxed going in (by Germany) and coming out (by the US). Not planning adequately to avoid double taxation is a common mistake global travelers make, and one that can be easily avoided by research and planning.
- Roth IRAs: Since Roth IRAs are funded with post-tax dollars, this is less of a concern for younger workers funding their IRAs, and more of a concern for older Americans abroad who wish to make withdrawals. Some countries have a treaty with the United States to avoid double taxation and will recognize the 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 in your country of residence. If your country of residence has a double-tax treaty with the United States, it is probably a “safe place” for you to start Roth withdrawals in retirement.
Others do not, and will treat Roth withdrawal money as taxable income. Again, this is a double-taxation scenario to avoid. You already paid tax on the money going into the Roth, so you should avoid making Roth withdrawals if you have residency in a country that will recognize your Roth withdrawals as taxable income.
This article gave a general overview of the rules of traditional and Roth IRAs, and special considerations that expat Americans will need to consider when opening, funding, and withdrawing from these accounts. Specific information about individual countries and scenarios is beyond the scope of this article. Contact an expert at Expat Tax Online to advise you on your individual situation.
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