Retirement Accounts for US Expats: Options Explained

Whether or not you intend to retire abroad, there’s one thing you can never be too careful with: how you save for retirement right now. Retirement accounts for expats require careful research and planning, and for Americans living abroad, there are special considerations to take into account.

In your sunset years, you’ll want to have some measure of financial comfort. Maybe you’ll even travel or move to that one destination you’ve always dreamed about. More and more, retirement is coming to be seen as a chapter of life filled with excitement and long-awaited adventure. Some people have even developed their life goals around being able to join the ranks of retirees at an earlier-than-usual age, in a movement known as Financial Independence, Retire Early (FIRE). In many cases across the board, travel and living abroad feature prominently in retirement plans. 

If you’re considering a move abroad, many logistical questions will bubble up. For example, at some point the question will occur to you, “Can I own or participate in an IRA or 401(k) if I’m living abroad?” 

The short answer is yes. But as with most things in tax, there are exceptions and requirements to meet.

Today, we discuss the following retirement options as potential retirement accounts for expats, reviewing how saving in each may impact you now and in the future:

  • IRA-based retirement options
  • 401(k) retirement options

What you should know about IRA-based retirement options

An IRA is an individual retirement arrangement that allows you to make tax-deferred investments (read: save now, tax later). There are four main types of IRA retirement accounts:

  1. Traditional IRA
  2. Roth IRA
  3. SEP (Simplified Employee Pension) IRAs (for businesses with any number of employees)
  4. SIMPLE (Savings Incentive Match Plan for Employees) IRAs (for businesses with 100 or fewer employees)

Now, each of these IRA types come with a host of intricate variations. That said, these are the front-page features of IRAs Americans living in abroad should keep in mind:

-Contributions to SEP, traditional, and SIMPLE IRAs are tax deductible now, meaning they can lower your current tax liability. However, you’ll eventually pay tax when making withdrawals.

-Contributions to Roth IRAs are made post-tax. You pay the tax today. And the effect is that when finally making withdrawals from Roth IRAs, they’re tax free.

-While early withdrawals from an SEP, traditional, and SIMPLE IRA can attract a 10% penalty, you can withdraw contributions (but not growth) from a Roth IRA anytime without paying any penalties.

-SIMPLE and SEP IRAs work like traditional IRAs except that they apply to business owners and those who are self-employed. 

-SIMPLE and SEP IRAs also allow for much higher contribution limits: $15,500 and $66,000, respectively, for 2023—compared to only $6,500 for either a Roth or a traditional IRA.

-Finally, only businesses with 100 or fewer employees can create a SIMPLE IRA. But there are no employee limits on SEP IRAs. 

Visualizing Retirement Account Types 

Retirement Account Types, 2023Traditional IRARoth IRASEP IRASIMPLE IRA
Tax effect when making contributionsContributions are tax-deductibleContributions are made post-taxContributions are tax-deductibleContributions are tax-deductible
Tax effect when making withdrawalsWithdrawals are taxable incomeWithdrawals are tax-freeWithdrawals are taxable incomeWithdrawals are taxable income
Early withdrawal penalty10% penalty on early withdrawalsNo penalty on early withdrawals of contribution. 10% penalty on growth-portion only.10% penalty on early withdrawals10% penalty on early withdrawals
Contribution limit$6,500$6,500$66,000$15,500
Who contributesThe individualThe individualThe employerEmployer and employee
Number of employees per organizationN/AN/AAny number100 or less

Here’s what expats should know about saving with IRAs

According to the US Census Bureau, as of 2021, approximately 18% of working-age individuals have some type of IRA. 

Expats may need to consider some critical factors before saving with an IRA-based retirement option.

The Foreign Earned Income Exclusion can limit your IRA contributions

The Foreign Earned Income Exclusion (FEIE) is the maximum income a US expat can earn abroad without paying tax to the IRS. This amount can be excluded from US taxation—whether or not you’ve paid tax in your country of residence. 

For 2023, the maximum FEIE amount is $120,000.

To contribute to an IRA, an expat must have earned more foreign income than the FEIE amount.

The key here is that you must have earned income to make IRA contributions. 

Let’s say you earn $100,000 while living in Germany and claim the FEIE on your 2023 US tax return. Since you’ll exclude your German salary from your 2023 tax return, you’ll have no earned income in the IRS’s eyes. 

This is an important detail because if you contribute to an IRA when you were not allowed, the IRS will treat the extra amount you’ve contributed as an excess contribution and slap you with a 6% penalty on the excess contribution.

Roth IRA contributions have income limitations

Just because you earn way more than the FEIE amount, don’t assume you can put the entire excess amount in an IRA. In particular, Roth IRAs have income restrictions on who can contribute. 

Your eligibility starts with evaluating your modified adjusted gross income (MAGI). You can get to your MAGI by adding your FEIE to your Adjusted Gross Income (AGI). 

For single taxpayers, the MAGI limit for 2023 is $138,000 ($218,000 for married filing jointly) to make the full $6,500 Roth contribution. And when your MAGI is $153,000 ($228,000 for married filing jointly) or more, you can’t make a Roth contribution. 

Hence, if your 2023 foreign income is $110,000, and you have no other sources of income, you’ll be able to make the full $6,500 Roth IRA contribution.

Here is another factor to consider.

  • If your foreign income is way above the MAGI limit, and you want to contribute to a Roth IRA, you can contribute to a traditional IRA. Later, you can convert your traditional IRA to a Roth IRA. This technique is known as a “backdoor” Roth contribution. 

Here’s what you should know about saving in a 401(k) plan

A 401(k) is, hands-down, one of the best retirement options for the following reasons:

  • 401(k) contribution limits are much higher than those of IRAs: $22,500 compared to $6,500 for IRAs in 2023.
  • The possibility of employers matching employees’ contributions is an exciting way to get additional income.

Sadly for expats living abroad, saving with a 401(k) may not be tenable. This is because, in most cases, to contribute to a 401(k), your employer must be a US-based company offering a 401(k) plan.

As you’ve seen, planning retirement accounts for expats requires some research

As an expat, you need to go about your retirement planning meticulously. As a retiree, you’ll want to have plenty of disposable cash, which means you’ll need to have a comfortable amount of savings. You’ll also likely want to pursue a hobby, or perhaps traveling the world will be your hobby – hopping from one secluded island to another. Retirement accounts for expats exist, but it can be challenging to understand which one is the best option for your particular circumstance.

Read more: How To Move Your US Retirement Account Overseas

Plan for retirement by enlisting the help of a trained US-tax professional specializing in expat taxes

At Bright!Tax, we’ve guided hundreds of expats to make sound decisions concerning planning retirement accounts for expats. As US expat tax experts, we can look at your situation and offer tailored advice.  Contact us today to get started

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