Do you wish to know about Roth IRAs vs. traditional for expats when making contributions to retirement? You have come to the right place where we at USTAXFiling will discuss everything in detail related to Roth IRAs and Traditional for expats. So, stay tuned and continue to read the article until the end!
Many Americans have issues knowing the details of their IRAs (Individual Retirement Accounts). If you shift to a foreign nation, IRA policies become more complex. To aid in making sense of this complicated topic, here is something that you must understand about Roth and traditional IRAs for expats when making contributions to retirement.
- Roth IRAs and Traditional IRAs have ample overlap, but they have a few differences.
- The major difference is that you may add contributions to a traditional IRA up to 70 years of age and tax-deferred, whereas there is no specific age limit to contribute to a Roth IRA, and the contributions are not at all tax-deferred.
Can Americans staying overseas maintain an IRA?
Yes, there is no doubt that citizens of the US staying abroad can maintain both Roth and traditional IRAs (Individual Retirement Accounts). Also, there are no limitations on who may make contributions. It means that while you don’t have to transfer your IRA assets or even dissolve them while staying overseas, you cannot add to them either.
What Are IRA Contribution Regulations for Americans Abroad
Whether you may contribute to an IRA or not while staying abroad depends on any exclusions or deductions and the income level you claim. As a quick overview:
- You may contribute to a Roth IRA (Individual Retirement Account) if you get taxable income and modified adjusted gross income (MAGI) is below specific eligibility.
- You may also contribute to a traditional IRA (International Retirement Account) if you are under 70 years and get taxable income.
For US expats, the most important thing is taxable income. All citizens of the US have to file a US federal income tax return and report their income worldwide regardless of where they stay. Also, the IRS offers a range of tax exclusions as well as deductions for Americans staying overseas. Due to this, several expats don’t even end up owning any taxes.
If you don’t have any taxable income once you apply the exclusions and deductions available, you don’t have to pay any taxable income, and so be ineligible to contribute to a Roth IRA or traditional IRA.
Let us discuss a few examples.
- Suzan, a citizen of the US, shifts to Norway. She works as an occupational therapist and earns around $80000 every year. Using the FEIE (Foreign earned income exclusion), she excludes her income from US taxation. There is no leftover taxable income, and Suzan cannot contribute to a Roth or even a traditional IRA.
- Michael shifts to South Korea, where he works as an optometrist. His salary is $150,000 every year. As per the 2022 FEIE (Foreign earned income exclusion) amount, he excludes $112,000 of income from US taxation. As Michael has $38000 taxable income left over, he can contribute to an IRA (as long as he meets the other criteria, too)
It is a simplified form of the IRA (Individual Retirement Account) contribution regulations for expats. The regulations might differ widely based on the foreign country you reside in or your financial information. We would advise you to consult an expat tax professional when you consider your IRA eligibility.
The Difference between Traditional and Roth IRA
Roth IRAs and Traditional IRAs have ample overlap, but they might have notable differences.
Traditional IRAs (Individual Retirement Accounts)
- The contributions are tax-deferred, which means that you don’t have to pay any income taxes on them until you withdraw the funds from your account. You might even add contributions to a traditional IRA (Individual Revenue Account) for up to 70 years.
- You may start withdrawing your IRA (Individual Revenue Account) funds at 60 years without any charges (apart from the income taxes you deferred when making your contributions)
- You may deduct your traditional IRA (Individual Revenue Account) contributions on your income tax return for the financial year you contributed them.
- If you withdraw from an IRA (Individual Revenue Account) before 60 years, you might have to pay early withdrawal charges (few exceptions might apply, such as when having a kid or purchasing a first home)
Roth IRAs (Individual Retirement Accounts)
- Roth (Individual Retirement Account) contributions are not tax-deferred, and the funds that you deposit into your account are after-tax.
- There is no age limit when contributing to a Roth IRA (Individual Retirement Account)
- You may withdraw Roth IRA funds at any time without any charges, regardless of age.
- You cannot deduct Roth IRA (Individual Retirement Accounts) from after-tax amounts; your withdrawals cannot be taxed as it might count as double taxation.
- You cannot deduct Roth IRA (Individual Retirement Accounts) contributions on your income tax return (though you may not have to report them)
Set Up an IRA (Individual Retirement Account) while staying overseas.
Can expats set up an IRA (Individual Retirement Account) while staying overseas? Yes, you may build either a Roth or traditional IRA(Individual Retirement Account) (Though the regulations discussed above might dictate whether you may make any contributions to either)
If you already stay abroad, we would suggest you choose a US-based IRA(Individual Retirement Abroad) rather than a foreign IRA. Foreign investments are income taxed differently from US investments and come with heavier reporting needs. Also, there are exceptions to the regulations. An expat tax expert may help you with the best choice for your individual situation.
Can You Shift Your IRA (Individual Retirement Account) Abroad?
Rolling an existing US IRA (Individual Retirement Account) into a foreign pension is possible in a few scenarios, but it is easy. It is even easy to withdraw the amount from your IRA (Individual Retirement Account) and open a new account in a foreign country. Also, if you have a traditional IRA (Individual Retirement Account), it might even lead to steep charges if you withdraw the funds before reaching the age of 60.
How to Calculate MAGI (Modified Adjusted Gross Income) for a Roth IRA for Expats
As discussed above, your MAGI (Modified Adjusted Gross Income) should be below specific criteria to make Roth IRA (Individual Retirement Account) contributions. Also, when you consider whether you are eligible to contribute to a Roth IRA (Individual Retirement Account), you have to calculate your MAGI (Modified Adjusted Gross Income)
Your MAGI (Modified Adjusted Gross Income) is your AGI (Gross adjusted income) in addition to any untaxed:
- Social Security income
- Foreign earned income
It means that even if you use any expat tax exclusions or exemptions, your foreign income is still a part of your MAGI (Modified adjusted gross income). For instance, if you use the FEIE (Foreign earned income exclusion) to exclude a part or all of your foreign income, that income might still count toward your MAGI (Modified adjusted gross income)
What if the FEIE disqualifies from contributing to the IRA?
When you claim the FEIE excludes all of your income that is foreign earned from taxation, you are not eligible to make any IRA contributions. So, what are your options? Let us take a look.
Refusing the FEIE (Foreign earned income exclusion)
Firstly, you might prefer not to claim the FEIE (Foreign earned income exclusion) at all. You don’t have to use the FEIE even if you become eligible for it. Also, if you have used the FEIE in the past, you may have to revoke your election to use it explicitly, and you cannot claim it again for five years.
Claiming only part of the FEIE
Based on your case, you might claim only a part of the FEIE (Foreign earned income exclusion). It depends on whether you become eligible for the FEIE under the physical presence test or the bona fide residence test.
You have to claim the complete FEIE amount available to you. It is nothing. As the bona fide residence test is eligible for you for the complete financial year for the FEIE, you should claim the complete FEIE amount for that financial year.
Also, the physical presence test is not at all tied to any specific financial year. It implies an annual period. If you time your trips to and from the US, you might decrease the amount of FEIE you become eligible for in a given financial year. It might help you to claim a small part of the FEIE while still having taxable income left over to contribute to an expat IRA (Individual Retirement Account)
Tax-free Roth IRA (Individual Retirement Accounts) Conversions
In a few cases, even if you use the FEIE to exclude foreign income, you may convert a few of your pre-tax funds into a Roth IRA without paying anything. You can consult an expat tax professional to know if this is an option for you.
How to calculate how much you may contribute to an IRA
If you are eligible to make any contributions to a Roth IRA or traditional IRA, there might be a maximum amount that you are allowed to contribute every year. The amount depends on filing status, age, and income. The IRS (Internal Revenue Service) offers a table explaining how much you may contribute during the current financial year.
Still, have any doubts related to IRAs? Get assistance from an Expat Tax Expert.
Do you have any questions about Roth IRAs and traditional IRAs for expats? No issue! We have all the answers that you are looking for. Also, we at USTAXFiling will assist you in meeting your US tax obligations. Our USTAXFiling experts are here to help you in the best possible way. They will make sure to discuss with you all your problems and resolve them at the earliest. Our dedicated and committed team of tax experts have years of rich experience and are highly qualified to give you advice on your specific tax situation. So, what are you waiting for? Call us right away at USTAXFiling to help you with your tax queries and income tax filing!