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Can U.S. Expats (Americans Abroad) Contribute to IRAs or 401(k)s?

Find out whether U.S. expats can qualify to contribute to IRAs or 401(k)s despite being an American living abroad -- especially when it comes to taxes.

As a U.S. citizen, you pay federal income taxes on your worldwide income regardless of where you earn it. Of course, there is a long list of exceptions and particular circumstances depending on your situation.

Most people need a tax professional to deal with the relatively easy situations of U.S. citizens living in the United States. When you move, work and earn income overseas, the level of complexity is much higher.

As such, it makes sense to consult a tax professional about your expat taxes. They should be aware of tax breaks you can use to get a tax reduction in your total tax bill as an expat.

It’s helpful to know the general rules of how taxes work before you visit your tax professional. That way you’re prepared to ask the right questions.

If you’re an American considering living abroad or you’re already a U.S. expat, you might be wondering what your options are for saving for retirement. Can expats contribute to IRAs or 401(k)s like they could if they lived and worked in the United States?

That depends. Whether you can contribute to an IRA or 401(k) depends on your specific situation. Here is what you need to know on a fundamental level. Then, you can ask a tax professional specific questions.

How Contributing to an IRA Works

Before we get into the complexities of being a U.S. expat, you need to understand how IRA contributions work on a basic level. You must be eligible to contribute to an IRA before you contribute.

In total, you can contribute up to $6,000 per year to a traditional IRA or $7,000 per year if you’re age 50 or older. Generally, if your earned income is less than this amount, your contributions are limited to your earned income.

Whether contributions to an IRA are tax-deductible depends on your workplace retirement plan options. If your workplace doesn’t offer a retirement plan, your traditional IRA contributions may be deductible up to the full amount. 

If you or your spouse’s workplace does offer a retirement plan, your deduction could be limited based on your income. You can learn more on the IRS website

Another option is a Roth IRA. Roth IRAs don’t give you a tax deduction today. Money withdrawn in retirement is usually tax-free.

The contribution limits are the same for a Roth IRA as they are for a traditional IRA. Additionally, the limit applies across IRAs combined including both traditional and Roth IRAs. That means you can’t contribute $6,000 to a Roth IRA and $6,000 to a traditional IRA in the same year. 

Roth IRAs require your income to be below a certain modified adjusted gross income threshold to be eligible to contribute to a Roth IRA to the full limit. 

If your modified AGI exceeds this level, the contribution cap phases out. Eventually, the contribution limit reaches zero. The income levels vary depending on your tax filing status.

The key to this for U.S. expats is you must have earned income to contribute to an IRA or Roth IRA. Without earned income, you cannot make a contribution to these accounts.

The most common sources of earned income include wages from a job or net earnings from self-employment.

How Living Overseas Can Impact This

When you live overseas as a U.S. citizen, your tax situation gets extremely complicated. The United States has tax treaties with many countries that govern how taxes work for both U.S. citizens and citizens of other countries.

Understanding these tax treaties isn’t always easy. Additionally, the rules may vary depending on what country you’re in.

There are some general rules that can be used to help offset the income tax issues with living overseas. These may or may not apply to your specific situation, so consult a tax professional for more guidance.

Foreign Earned Income Exclusion

The foreign earned income exclusion can help you exclude a certain amount of your foreign earnings from your federal tax return. In 2019, the maximum exclusion is $105,900. 

The rules for determining whether you qualify can be complex. It is easiest to consult a professional or use the IRS’s interactive tax assistant to determine if you qualify. 

Unfortunately, this exclusion can make qualifying to make IRA contributions a bit tricky. Since you can exclude the income, that means you may not have any earned income to use for IRA contributions.

If you earn over the $105,900 exclusion amount, you have to be very careful. Make sure that you’re not exceeding the income level requirements when contributing to a traditional or Roth IRA. 

When calculating your income for the contribution limit income numbers, you have to add back exclusions and deductions. That includes the foreign earned income exclusion and foreign housing exclusion amounts. You must also add back any foreign housing deductions, as well.

Based on these complicated calculations, the window may be very small where you can take both the foreign earned income exclusion and still qualify to make certain IRA contributions. It is possible, but you must manage your income to make it happen.

Foreign Housing Exclusions or Deductions

In some instances, you may qualify for another income exclusion or deduction. The foreign housing exclusion and foreign housing deductions are also complex.

Your tax home must be in a foreign country and you must qualify for these amounts under the bona fide resident test or the physical presence test.

The exclusion only works for amounts that are paid for by employer-provided amounts. The housing deduction only works for self-employment earnings.

To learn more about these complicated topics, visit the IRS page for this exclusion or deduction.

Foreign Tax Credit

One way to keep enough earned income to make IRA contributions is to claim the foreign tax credit instead of the foreign earned income exclusion if you qualify. 

The foreign tax credit does not reduce your earned income. Instead, a tax credit reduces the amount of tax you owe by one dollar for each dollar of the tax credit.

That means contributing to an IRA can be much easier. It may not make financial sense for your situation, though.

Ultimately, you’ll need to run the numbers. This way, you can determine whether taking the foreign tax credit and making IRA contributions offers a lower overall tax burden than using the foreign earned income exclusion. 

Can Expats Contribute to an IRA or 401(k)?

Technically, it is possible for expats to contribute to IRAs or 401(k)s. You just have to meet the requirements for doing so. Your situation may not be flexible enough to be able to contribute to these tax-advantaged retirement accounts.

While an IRA is an option whether you’re employed by a U.S. company or not, the 401(k) isn’t as simple.

You either have to be working for a U.S. company that offers a 401(k) or be self-employed and set up a solo 401(k) yourself to make contributions. 

Even then, your 401(k) contributions may be limited. This depends on your specific tax situation. Consult a tax professional about your tax situation to find out if you’re eligible to contribute to an employer-sponsored 401(k) plan.

Consult a Tax Professional to Make a Plan

Overall, it makes more sense to look at the big picture. You may save some money on taxes by investing in a tax-advantaged retirement account. 

That said, you shouldn’t do so if it doesn’t make financial sense. If you save more money overall by using the foreign earned income exclusion or foreign housing exclusion or deduction, don’t opt not to use them simply to contribute to a retirement account.

If you have to pay more in taxes than you get from the retirement contribution benefit, you may be better off investing in a taxable investment account.

To figure out if you can contribute to an IRA as an expat, you really need to examine your specific situation. Then, compare your situation to the very long list of U.S. tax rules. Only then will you know if you qualify or not.

To make this process easier, you should consult a tax professional. In particular, find a tax professional that is well-versed in expat tax situations. 

Not all tax professionals deal with expats on a regular basis. By consulting a professional that is not an expert, you may get bad advice or it may take longer to get the advice you need.

Tax professionals can help you determine your tax liability. They can help you look for tax savings and how to lower your tax rates both in this tax year and in the future. 

Of course, tax professionals can’t work miracles. They can only use the current taxation system’s rules to lower your tax liability as much as possible based on your situation. 

Their expertise is often well worth the cost. It can save you a major headache and a bunch of time, too.