A Simple Guide: IRA Contributions as an American Expat
Americans struggle with a lack of knowledge about their retirement plans. According to a survey by GOBankingRates, over 37% of Americans feel like they don’t know enough about retirement and need more education on how they can successfully retire.
When a US expat decides to move overseas, understanding how to contribute to their IRA retirement account becomes even more complicated. In this simple guide, we will cover the basics that US expats need to know about making IRA contributions while living abroad. Here’s what you’ll learn:
- – Traditional IRA vs. Roth IRAs: What’s the difference?
- – IRA Contributions for US Expats: What are the rules?
- – How to Calculate How Much You Can Contribute to Your IRA
- – How to Set Up Your IRA From Overseas
Traditional vs. Roth IRAs: What’s the difference?
Not familiar with IRAs? No worries. Here are the differences between Traditional and Roth IRAs that you should know…
Contributions are deductible depending on various factors:
- – Your income
- – Your filing status
- – If you have an employer-sponsored retirement plan
- – If you can contribute regardless of your income level or filing status.
- – You can start withdrawing at 59 ½ years old without penalties
- – You need to be under 70 ½ years old to contribute.
Contributions are not tax-deductible
- – You can contribute as long as you don’t surpass the IRS’ income thresholds which depend on
- – Your income
- – Your filing status
- – Your withdrawals or distributions are not taxable
- – There’s no age limit for contributing to a Roth IRA
IRA Contributions for US Expats: What are the rules?
American expats who live and work overseas can still make contributions to their IRAs. However, some restrictions apply.
To contribute to an IRA while living overseas, American expats must have earned income left after their exclusions and deductions. For example, if you exclude all of your income with the Foreign Earned Income Exclusion (FEIE), you won’t be able to contribute to your IRA.
Read more: IRS Foreign Earned Income Exclusion 2022 – Ultimate Guide
The maximum you can exclude with the FEIE in 2022 is $112,000. So let’s say you’re a US expat who works as a web developer in Switzerland and earns over $100,000 per year.
You decide to take advantage of the FEIE to exclude the income from your US tax return and avoid double taxation. In this case, since you have no taxable earned income left, you can’t contribute to your IRA.
Let’s also look at an example in which an expat can contribute to their IRA. You’re an American surgeon living in France who makes $150,000 per year.
With the FEIE, you can only exclude $112,000 of your income on your US tax return. However, you can use the remaining $38,000 in the adjusted gross income you have left over to contribute to your IRA.
How Much Can You Contribute to Your IRA?
According to the IRS, the maximum amount of contributions you can make to your traditional and Roth IRA can’t be more than $6000 or your taxable earned income. People above 50 can contribute up to $7000 to their IRAs by making “catch up” contributions.
You can contribute to a traditional IRA regardless of your income level. However, depending on your income and filing status, you might not be able to contribute to a Roth IRA.
Roth IRA Contribution Limits for 2022
|Your Filing Status||Your Modified Adjusted Gross Income (MAGI)||How Much You Can Contribute|
|Married filing jointly or qualifying widow(er)||< $204,000||Up to the limit|
|Married filing jointly or qualifying widow(er)||> $204,000 but < $214,000||A reduced amount|
|Married filing jointly or qualifying widow(er)||> $214,000||Zero|
|Married filing separately and you lived with your spouse at any time during the year||< $10,000||A reduced amount|
|Married filing separately and you lived with your spouse at any time during the year||> $10,000||Zero|
|Single, head of household, or married filing separately and you did not live with your spouse at any time during the year||< $129,000||Up to the limit|
|Single, head of household, or married filing separately and you did not live with your spouse at any time during the year||> $129,000 but < $144,000||A reduced amount|
|Single, head of household, or married filing separately and you did not live with your spouse at any time during the year||> $144,000||Zero|
As you can see in the table above, your Modified Adjusted Gross Income (MAGI) is a significant factor influencing whether you can contribute to an IRA. To calculate your MAGI, you must take into account both your gross income from all sources (such as wages or rental income) and your adjusted gross income.
Get the Help You Need With IRA Contributions While Overseas
IRAs and retirement plans aren’t easy subjects to understand. And moving overseas adds a layer of difficulty that can make them even more confusing if you don’t have a tax background.
If you wish to continue making IRA contributions while living overseas but still have questions, it’s best to reach out to a trusted US expat tax advisor.
At Bright!Tax, we’ve helped countless Americans across 200 countries with their taxes abroad. Contact us to learn more about our services, or feel free to read some of our reviews from previous happy clients.