IRAs for Expats

Can I Contribute to an IRA If I’m Living Abroad?

The US has created a number of retirement accounts to incentivize taking ownership of your financial future. These accounts allow for great tax planning strategies, help with behavior, and are generally simple to use. For most US citizens, contributing to an IRA seems like a simple decision. However if you are an expat, an American living abroad or a foreign citizen living in the US, simple money questions like “Can I even open this account?” begin to feel more complex. 

The Basics

An IRA, or Individual Retirement Arrangement, is a tax-advantaged retirement account offered in the US. IRAs are not tied to an employer, meaning almost anyone can open an IRA at any provider they choose, regardless of their job. The annual contribution limit for IRAs in 2024 is $7,000, or $8,000 if you’re age 50 or older.

If you are a US citizen working abroad, you are able to have an IRA. However, your ability to contribute depends on your income level, as well as certain deductions and exclusions.

Earned Income Requirement

Whether living in the US or abroad, anyone contributing to an IRA must have some amount of earned income. Your IRA contributions cannot exceed your earned income for the year. In a simplified example, if you are a part-time worker and your income for the year is only $3,000, you can only contribute up to $3,000 that year instead of the standard $7,000 contribution limit.

In reality, the amount you are able to contribute is a slightly adjusted formula called your modified adjusted gross income (MAGI). For most living in the US, this adjustment does not cause much of an issue, as their income is likely well above $7,000 annually. However, there are some unique factors for those working abroad that could have a significant impact.

Foreign Exclusions & Deductions

If you are a US citizen working abroad, you may qualify for unique exclusions and deductions like the foreign earned income exclusion and the foreign housing exclusion or deduction. If you claim any of these, your taxable liability will be reduced, but so will your MAGI. In 2024, the maximum foreign earned income exclusion is $126,500. If you are claiming the foreign earned income exclusion and you want to contribute to an IRA, your salary would need to be beyond the $126,500 exclusion amount.

For example, let’s say you are working abroad in the UK making a salary equivalent to $100,000. You decide to take the foreign earned income exclusion that year. You would be excluding your entire salary, so your MAGI would drop down to $0. You would not be able to contribute to your IRA that year.

Alternatively, let’s say the next year you make $150,000. If you excluded the entire $126,500 under the foreign earned income exclusion, you would have enough earned income remaining and would likely be able to contribute the full $7,000 to your IRA that year.

If participating in an IRA is important to your financial plan but these exclusions lower your income beyond the limit, you may consider claiming the foreign tax credit (FTC) instead. However, make sure you weigh both options carefully. Deciding between the foreign tax credit and the foreign earned income exclusion is fairly complex and can affect your options for the next five years. There are many factors beyond participating in an IRA that should affect your decision. If you have questions about your situation, reach out and schedule a time to chat.

Notifying Your Brokerage

While the IRS may allow you to contribute to an IRA, your brokerage may not be as welcoming. Many brokerages deem expat clients as too high of a compliance risk, or they simply don’t want to deal with the extra foreign tax regulations that come with expat accounts. Because of this, they may freeze and liquidate your account if they discover you are living outside the US. It is always best to communicate with your brokerage before you make the move abroad. Ask them what their policy is for American expats. If your current brokerage does not allow you to have permanent residency abroad, then you likely want to look for another expat-friendly provider to roll your accounts over to. This can be a bit of a headache, but as with most things, planning ahead will help ease the burden.

Should I Contribute to Roth or Traditional?

There are two types of IRAs: Roth and Traditional. They function almost identically, but vary in their tax treatment. For Traditional IRAs, you can take a tax deduction on any contributions. Those contributions then grow tax-deferred and can be taken out at age 59 ½ at ordinary income rates. Roth IRAs on the other hand receive no deduction upfront. You contribute after-tax dollars. These dollars then grow tax-free and can be withdrawn tax-free at age 59 ½. 

It is also worth noting that Roth IRAs have an income limit. If your adjusted income is beyond this limit ($146,000-$161,000 for single filers in 2024), you no longer qualify to contribute to a Roth IRA. Traditional IRAs do not have an income limit for contributions, however you may earn too much to qualify for the tax deduction. If this happens, you will still be able to contribute and the money will still grow tax-deferred. You just won’t have the initial tax deduction on the contribution.

When deciding whether to contribute to a Roth IRA or Traditional IRA, it is important to look at your current vs. future tax rates. If you think your tax rate is going to be higher in retirement, you may want to consider contributing to a Roth IRA. If you think your tax rate is going to be lower in retirement, consider contributing to a Traditional IRA. Keep in mind, there are other factors to consider including your age, account structure, estate planning goals, and more. If you are an expat living abroad however, the most important factor may be your IRA’s tax treatment in the country you are living in.

How Will My IRAs Be Taxed If I Live Abroad?

The tax advantages of both the Roth and Traditional IRA are only guaranteed to be honored by the US. If you are living abroad, it is important to understand how the country you are living in treats these accounts as well. Since Roth IRAs are relatively new, they do not appear in the majority of tax treaties and may not be recognized as retirement accounts. As a result, the tax-advantaged status of Roth IRAs is often not acknowledged. Depending on where you live, you may be taxed on the dividends and distributions within the account, and possibly even taxed on full distributions or withdrawals at ordinary income rates. Traditional IRAs appear in more treaties, but is not uncommon for countries to not recognize the initial tax deduction on contributions.

This does not necessarily mean you should not contribute to an IRA. There are still advantages to contributing to IRAs, even without the favored foreign tax treatment. It does mean, however, that you should be aware of the policies and weigh the pros and cons for your situation. Each country’s tax treatment of both Roth and Traditional IRAs varies widely. Make sure you understand the implications for your financial plan.

Can I Contribute to an IRA as a non-US Citizen?

IRAs are available to non-US citizens that live and work in the US. However, if you are not planning to remain in the US permanently, you may face major tax consequences when transferring your accounts back to your home country. Consider consulting a financial advisor to help you know the consequences of transferring accounts and if there are ways of mitigating them for your situation.

IRAs are wonderful, tax-advantaged retirement accounts that can play an important role in your financial plan. While almost anyone can open an account, your ability to contribute depends on your income level and what exclusions and deductions you claim. If you are wanting to utilize an IRA in your financial plan, consider reaching out. At Aberdour investments, we work with expats regularly, and can look at your unique situation to help you find the best plan for you.