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American Expatriates & IRA - How Can You Benefit?

American Expatriates & IRA - How Can You Benefit?
Ines Zemelman, EA
20 September 2013

We at Taxes for Expats tend to get a lot of questions about benefits and rules of investing in an IRA, or Individual Retirement Account. We have prepared this list of frequently asked questions about IRA contributions and the answers to these questions.

Keep in mind that these questions and answers are specifically about a traditional IRA – not a ROTH IRA or other types of IRAs. To learn more about the different types of IRAs and the requirements and tax consequences of each, visit the IRS website and view Publication 590 or get in touch with an international tax expert.

Question 1: Is there an age limit to invest in an IRA?

Yes. You must not be older than 70 ½ al finale of the tax year in order to make your IRA contributions.

Question 2: Is there an income requirement?

Yes. In order to contribute to an IRA, you are required to have taxable income in the form of bonuses, commissions, salaries, tips, or wages (whether as an employee or from self-employment income).

Question 3: Can I contribute to an IRA with my spouse if I’m the only one earning income?

Generally speaking, yes. If you and your spouse file a joint return, your taxable income should qualify. You may be able to get a spousal IRA, which has the same rules as a traditional IRA but allows your spouse to have little or no income.

Question 4: Is there a time restriction on IRA contributions?

Yes and no. No, meaning that you are free to contribute to a traditional IRA at any point throughout the year. Yes, meaning that – in order for your contribution to be applied to the tax year for which you’re filing – you must have made your contribution(s) before the standard tax due date without any extensions. Any contributions made after these dates will not be included in your tax free contribution summary, even if you filed for an extension. If you do make your contribution before your standard tax return due date, you are advised to get in touch with your IRA account manager to ensure your contributions were applied to the correct year.

Question 5: Is there a limit to the amount I can invest in an IRA each year?

Yes. The limits in 2012 are as follows:

  • For taxpayers below the age of 50, you may not contribute more than $5K in a taxable year.
  • For taxpayers above the age of 50, you may not contribute more than $6K in a taxable year.
  • Your eligibility is determined by your age at the end of the year; so if you turned 50 during the year, you will be able to invest an additional $1K.

Question 6: Will I owe taxes on my IRA account?

Generally speaking, no – not until you begin to receive distributions. Until that time, your contributions and account balance should remain tax free.

Question 7: How do I deduct my IRA contributions on my US income tax return?

There are worksheets in the instructions for Form 1040 that help you determine your deductible amount.

Question 8: Are there any other tax credits available for my IRA?

Maybe. You may be eligible to receive an additional IRA tax credit called the Savers Credit. Single taxpayers may be able to get up to $1K while joint filers may qualify for a credit of up to $2K. To see if you qualify for this additional credit, use Form 8880.

Question 9: Should I use a specific Form 1040?

Yes. In order to deduct your IRA contributions and/or claim the Savers Credit, you must use either Form 1040 or Form 1040A.

Question 10: Can Americans living abroad (expatriates) contribute to an IRA?

Yes - provided you meet income requirements (See Q.2).

However, if you do not have taxable income after foreign earned income exclusion and/or foreign tax credit, contributing to a Traditional IRA makes no sense for you. Moreover, when you receive distributions from the IRA they will be taxable because it is implied that it was pretax income and you received tax savings when you made contributions. ROTH IRA is a better option if your income is within the level allowed for ROTH.

If you have taxable income after all exclusions and deductions then contribution to Traditional IRA for yourself and on behalf of your spouse is a great way to reduce tax bill. 

Ines Zemelman, EA
founder of Taxes for Expats