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IRA Contributions for American Expats Explained

U.S. workers usually save for retirement by contributing annually to either Roth or traditional IRA accounts. After moving overseas, it may not be possible to continue this practice. Many expats are ill-advised, however, because some accountants do not understand the complexities that surround an expat's tax life. As a result, you may have been advised to make unprofitable contributions to these accounts. This article addresses that problem, and what you should do if you have made contributions that your accountant should have advised against.

Qualifications for IRA Contribution

If you received taxable compensation during the year and you did not reach age seventy and a half by the end if the year, you are qualified to contribute to a traditional IRA. You can contribute to a Roth IRA if you received taxable compensation during the year, and, if your modified adjusted gross income falls below:

$179,000 if you are married and filing jointly or are a widow or widower.
$10,000 if you are married and filing separately (you must have lived with your spouse at some point during the year).
$122,000 if you are single, or if you are married filing separately but did not reside with your spouse at any point during the year.

If you meet the above qualifications, you may contribute to the relevant IRA account assuming your taxable compensation is:

Income earned from working in the U.S.
Foreign income in excess of the Foreign Housing and Foreign Earned Income Exclusions.
- Income from a stateside job held before moving
- Income from a U.S. summer job
- Income allocable to U.S. business trips
Compensation from the U.S. government (for government employees).
Qualifying employer contributions.

Taxable Compensation

To contribute to either IRA, you must receive taxable compensation. Taxable compensation is income earned through work. Money excluded from income, housing allowances and foreign earned income, for example, do not count as taxable compensation for the purpose of IRA accounts.

Modified Adjusted Gross Income

When determining whether or not you meet the qualifications for IRA contribution, it is your modified adjusted gross income that is considered. This AGI number is your income plus the amount deducted according to the Foreign Earned Income Exclusion.

Foreign Earned Income and Roth IRA Contributions

A Roth IRA is a vehicle for savings and can be established within the confines of an IRS approved institution (credit union, bank, brokerage house, etc.). A Roth IRA can be set up at any point during the year, but funds must be contributed by the due date of your return for that year (not including extensions). Contributions are limited as the modified adjusted gross income increases. Qualifying income includes, but is not limited to, salaries, wages, income earned through self-employment, commissions, alimony, and deferred compensation. Qualifying income does not include the amount covered by the Foreign Earned Income Exclusion or the Housing Exclusion. Lastly, qualifying income must not be less that the Roth IRA contribution.

If You Have Made Unprofitable Contributions

Both the traditional IRA and the Roth IRA are helpful and valuable savings methods. However, it is vastly important to determine whether you continue to qualify for contribution after moving overseas. If you believe you have made ill-advised contributions, or if you simply wish to avoid making this mistake, contact the experts at Taxes for Expats. Our knowledgeable staff will examine your individual situation, in detail, to determine your best course of action and whether or not you qualify for continued IRA contribution.