Saving for retirement while living overseas
I received a question from a reader about how to save for retirement in his Roth IRA, while living outside the United States. Specifically, he wanted to know whether he could just pay taxes on the amount he wanted to contribute to an IRA and exclude the rest.
If you earned less than $87,600 in 2008 and take the foreign earned income exclusion (FEIE), you have to take it on all your income. You can’t separate out a portion in order to contribute to an IRA.
However, if you earn more than $87,600, anything over this amount but below $5000 can be contributed to an IRA. So for example, say you earned $91,000 in 2008. The difference – $3400 – can be contributed to an IRA because you will also be paying US taxes on the $3400.
If you don’t earn over the FEIE amount of $87,600, one other possible way to contribute to an IRA is to take the foreign tax credit instead of the FEIE. This can be done by filing IRS Form 1116. Depending on the tax rates of your current country, if they are a similar level to the US, you may still end up owing none or very little US taxes on your income after subtracting the foreign taxes you’ve already paid. But if your foreign tax rates are low, you may owe a lot of US taxes not covered by the credit.
By taking the foreign tax credit though, you can contribute the full $5000 (assuming you earn > $5000) to an IRA since all your earnings are potentially subject to US taxes. This is still true even if the tax credit for the foregin taxes completely wipes out your US tax liability.
It’s definitely worth doing both Form 1116 (foreign tax credit) and Form 2555 (FEIE) to see which works out better for you.
Here are two articles that might help:
http://www.irs.gov/pub/irs-pdf/p54.pdf
http://www.aca.ch/joomla/index.php?option=com_content&task=view&id=156&Itemid=46
Link to form 1116 and the instructions:
http://www.irs.gov/pub/irs-pdf/f1116.pdf
http://www.irs.gov/pub/irs-pdf/i1116.pdf
Related posts:
- Basics of Saving for Retirement in the U.S.
- How to Use the US Foreign Earned Income Exlusion (FEIE)
- Basics of US Income Taxes for Americans Living Overseas
- US Income Taxes for Expats – Foreign Housing Exclusion or Deduction
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