So you are an American living and working abroad. You want to save for retirement. But you’re confused by the options available and the technical rules. This article provides quick answers to the most pressing questions regarding 401(k) plans, individual retirement accounts (IRAs) and foreign retirement plans.
Can I contribute to a 401(k) or 403(b) plan?
Maybe. This is an option only if you are working as an employee of a US-based company or organization or if you are self-employed. Those working for non-US companies won’t have this option available to them.
If you’re fortunate enough to have this option, it is one of the easiest ways as an expat to continue saving for retirement while working abroad.
By the way, if you can participate in a 401(k) or 403(b) plan, then you should strongly consider making Roth contributions rather than pre-tax contributions to the plan. That’s because you might be in a no tax or low tax situation while working abroad, and this provides an opportunity to accumulate after-tax savings during years when your US tax burden is relatively low compared to other years when working in the U.S. For more information on choosing Traditional vs. Roth 401(k) contributions, read more here.
Can I contribute to an Individual Retirement Account (IRA)?
Maybe. Here we need to do some math to figure out the answer. But first, we need to step back and see the lay of the land. In the United States, IRAs come in two varieties: traditional IRAs and Roth IRAs. Each variety of IRA has its own eligibility requirements based on the amount of income you earned.
For traditional IRAs, what we are looking at is does the person have any taxable earned income left over after we subtract out the foreign earned income and foreign housing exclusions. (Earned income means income from wages or self-employment). If so, then a person can contribute to a traditional IRA. The contribution amount would be limited to the lower of $5,500 or the net earned income amount calculated after subtracting out the foreign exclusions. If the person does not have any income left after accounting for the foreign deductions, then a contribution to a Traditional IRA is not allowed.
For those that can contribute, there is still another step to determine if that contribution is tax-deductible, which is the tax benefit that you want when making a contribution to a Traditional IRA. If you are covered by a retirement plan at their work and if you make too much income, then you might not be able to claim the deduction even though you can make the IRA contribution. The eligibility rules are too nuanced for the purposes of this blog, but this is something a tax advisor can help you determine when completing your U.S. tax return.
For Roth IRAs, we are looking at two things. The first requirement is that the person’s net earned income (minus any foreign earned income or foreign housing exclusions) needs to be more than zero. Second, the person’s adjusted gross income (but not subtracting the foreign earned income or foreign housing exclusions) needs to be less than the following amounts:
- For unmarried persons: $135,000;
- For married persons filing jointly: $189,000;
- For married persons filing separately: $10,000.
The follow-up questions then become what’s the maximum amount a person can contribute to a Roth IRA, which is again a complex calculation beyond the scope of this article.
If possible, expats should strongly consider making contributions to a Roth IRA, if they are eligible to do so. The reason is that expats are likely to be in a low-tax or no-tax situation in the United States while working abroad, and so the Roth IRA provides an opportunity to accumulate after-tax savings during years when their US tax burden is relatively low compared to other years.
Can I contribute to a foreign retirement plan?
Yes. Just be aware that a retirement plan based in another country does not qualify a person for any tax benefits in the United States. (The exception is for U.S. expats living in the United Kingdom, as they may be able to claim some some tax benefits related to their U.K. retirement accounts due to a tax treaty signed between the U.S. and the U.K.)
That means, contributions to a foreign retirement plan do not reduce how much income is subject to tax in the U.S. It may however save you taxes owed to your local country.
Also, any dividends, interest, and gains inside the foreign retirement plan are subject to U.S. tax in the year the investment earnings are credited to the person’s account, since foreign retirement plans do not qualify for deferral of tax.
The result is that there is added complexity in tracking the investments in these accounts since they will be taxed differently under the U.S. tax code as compared to the local tax code in most cases. Furthermore, the foreign retirement plan will likely need to be reported as a foreign financial account on the foreign bank account report.
Tax Move Takeaways
- 401(k) and 403(b) plans: For those that can contribute to a 401(k) or 403(b) plan, this is the simplest option available to save for retirement while living abroad. We highly encourage looking into making after-tax Roth 401(k) or 403(b) contributions, as this is often optimal for expats.
- IRAs: For those that do not have a 401(k) or 403(b) plan available to them, or for those that want to save additional money to retirement beyond their 401(k) or 403(b) plan, IRA contributions might be a possibility. However, there are strict income-based rules that determine eligibility that need to be followed.
- Foreign Retirement Plans: Contributions to foreign-based retirement plans are allowed but do not offer any tax relief for U.S. tax purposes (with the possible exception of UK residents). These might still be an effective tool to lowering the taxes owed to your local country.
- Finally, you and your tax advisor should analyze retirement options each year, as changes in your income situation could impact which retirement plans make sense for you.
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