Can Expats Make IRA Contributions?

Living and working abroad can be an exciting, satisfying and profitable experience. But on the flip side, there are tax considerations that come into play, as well as concerns about planning for a secure retirement. One of them is the ability to make regular contributions to an individual retirement account (IRA) from wages earned abroad.

While in general the rules governing IRA contributions remain the same whether the earner lives in the United States or outside the country, there are additional tax considerations that govern foreign earned income. In broad generalities, the first $126,500 earned as a foreign employee or though self-employment abroad is eligible for a foreign earned income tax exemption. Expats may also claim a tax exemption for foreign housing costs.

Taking advantage of such exclusions, though, can limit the dollar amount of individual contributions to either traditional or Roth IRAs. The earnings cap for a Roth IRA for a single filer is $161,000 modified adjusted gross income (and phase outs start at $146,000), so the window of eligibility for "taxable income" can become rather narrow. For married filing jointly, the limit is $240,000 with phase out starting at $230,000.

Regular IRAs bear no income cap, but contribution eligibility is available only to those with wages or earned income greater than the foreign exclusion amounts.

An alternative for American expats is to claim the foreign tax credit on taxes paid in their country of residence. By doing this, the foreign income is taken into account in the tax calculation but the taxes owed in the US will be offset against the taxes already paid in the country of residence. All earnings are then deemed taxable income which increases the eligibility for IRA contributions. This works in high tax states in Europe, but not so well in low tax states like the UAE.

The wise course of action, for any American earning money in a foreign country is to consult with a reputable tax attorney or accountant. Planning is necessary in order to reap the extensive benefits of living and working abroad, in addition to assuring a secure future by continuing contributions to retirement accounts.

Get in touch if you need guidance, one of our qualified advisors would be more than happy to assist you.

All numbers referenced are for tax year 2024.

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