One question we often get from individuals living abroad and informal expats is whether a Roth IRA is still an option while living abroad. In this article, we’ll walk through some general information about tax implications for these types of accounts and what to consider.
Please remember that when it comes to expat and cross-border taxes, the best approach is to treat your situation as unique. There are so many factors that impact your tax strategy and eligibility, including existing tax treaties, which countries are involved, where your employer is based, and whether you are living abroad or have formally expatriated, just to name a few.
If you’re looking for a cross-border accountant, our team of experts are here to help. We work with a focus on bringing years of expat tax experience to your unique situation.
What is a Roth IRA?
A Roth IRA is a U.S.-based retirement account to which individuals can contribute post-tax dollars in order to take tax-free withdrawals after age 59 ½, plus limited amounts after 5 years for first time home purchase costs. Remember, there is an income cap on Roth IRA eligibility!
What is Foreign-Earned Income?
If you take a salary or are paid wages, fees, retainers, etc. for any professional services provided while living and (typically) working in a foreign country, this is considered foreign-earned income. This includes self employment income and, in some cases, remote work for the U.S. completed while living abroad.
It does not include income earned through military and civilian employment by the U.S. government, services conducted in international waters and airspace, payments after the relevant tax year, pension and social security benefits, and pay excluded from income (food, lodging, etc.).
Important Note: If your income qualifies as foreign earned income, you may be eligible for tax exclusions that will impact your eligibility for Roth IRA contributions.
Contributions While Living Abroad
Can I contribute to a Roth IRA with Foreign Earned Income?
Important note: if you take the foreign housing and/or foreign earned income exclusions, you may not meet the income requirements to contribute to a Roth IRA. This is typically because these exclusions significantly reduce your Modified Adjusted Gross Income, which determines your Roth IRA eligibility.
Yes. You can contribute to your Roth IRA with foreign-earned income in the same way you would with income earned living and working in the U.S. The same contribution limits for a Roth IRA apply whether you are living abroad or in the U.S. For 2024, that’s $7,000 for individuals under the age of 50, with $1,000 additional available for individuals age 50+.
The key difference for a US citizen living abroad is that there are tax credits and exclusions for foreign income that impact eligibility to contribute to a Roth IRA. We’ll get into this in more detail below, but in most cases, you’ll need to work with a CPA to come up with a strategy for ensuring your eligibility. Many expats and citizens living abroad take the Foreign Earned Income Exclusions and Foreign Housing Exclusion, which means their modified adjusted gross income is reduced significantly. Since you must have earned income in order to make a contribution, you may need to exclude part of your income from the foreign tax credits in order to ensure you are eligible to contribute.
The Foreign Earned Income Exclusions (FEIE) and How it Impacts Your Contribution Eligibility
The Foreign Earned Income Exclusion is available to individuals living abroad who meet certain requirements.
According to the IRS, your tax home must be in a foreign country, and you must be one of the following…
- A U.S. citizen who is a resident of a foreign country or countries for the tax year
- A U.S. resident alien and citizen of a country with an income tax treaty who resides in a foreign country for the tax year
- A U.S. citizen or resident alien who is present in a foreign country for 330 full days during a 12 month period
…in order to qualify.
Since you are taxed on your worldwide income, the IRS allows you to exclude your foreign earnings up to an annual amount (for 2023, that amount was $120,000) to lower your taxable income. However, in most cases you cannot use excluded income to contribute to a Roth IRA. In most cases you will need income exceeding the FEIE exclusion for the contribution, and there are potential penalties.
This can reduce your global tax burden, however, it’s important to note that if you qualify for and take the FEIE, including the foreign housing exclusion or deduction, you may no longer meet the income requirements to contribute to a Roth IRA. You may also pay penalties for contributions.
Speak with a cross-border CPA to come up with a plan if reserving money for contributions is a priority for you.
Taking Distributions While Living Abroad
Can I Withdraw Money From My Roth IRA While Abroad?
The same rules for withdrawals and rollovers apply whether you are withdrawing from your Roth IRA while living in the U.S. or abroad.
However, taking distributions can get complicated in countries that tax their permanent residents on their worldwide income. If there is an existing tax treaty between the country in which you reside and the U.S., then usually that treaty will ensure you avoid being taxed on any Roth IRA income in your country of residence. Canada, the United Kingdom, and France are just a few countries who honor the tax-deferment promised in a Roth IRA.
If there is no tax treaty, your country of residence could impose taxes on the Roth IRA’s value, dividends, and distributions. In the worst case scenario, if your country of residence taxes you on your worldwide income and doesn’t have a tax treaty, your distributions could be taxed as income.
Should I Move My Roth IRA to an Account in My Current Country?
In most circumstances, withdrawing from your IRA to put into a new account overseas can be complicated, especially when you consider rollovers, money that account is generating, and your overall financial health and goals. Make sure you speak with a cross-border CPA and international financial advisor before making any major changes.
Other Helpful Notes
Filing Requirements – FATCA, FBAR, Form 8938, and More
There are some basic filing requirements to keep in mind. If you carry a bank account or investment and other financial assets in your country of residence, you will likely need to file FBAR: Report of Foreign Bank and Financial Accounts.
The Foreign Account Tax Compliance Act (FATCA) outlines reporting requirements for foreign bank accounts and assets. This can include:
- Form 8938: Statement of Specified Foreign Financial Assets
- Form FinCEN114: Report of Foreign Bank and Financial Accounts
- And, others.
Make sure you speak with a cross-border CPA who can help you understand what forms you need to file.
How Exchange Rates Impact Your Roth IRA
One often overlooked element of tax planning is to closely monitor currency fluctuations and strategically plan your contributions and distributions around them. Because global currency fluctuates, your contributions could be fiscally advantageous one year, and fiscally adverse the next. At the same time, it may be advisable to take larger distributions when the exchange rate is in your favor.
Work closely with your CPA, monitor exchange rates, and plan accordingly. Always honor the contribution and withdrawal limits.
Remote Work and the 183 Day Rule
If you are working remotely and consistently stay in a different country for 183 days, you may be considered a tax resident, which means your global income will be taxed by both your country of residence and country of citizenship. However, the way this impacts your taxes depends hugely on the country involved and existing tax treaties, as well as factors like your visa, whether you have a local bank account, and more.
Your employer may require you to fill out W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)) or, if you are an independent contractor, W-8BEN-E (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)).
Regardless, if you are a remote worker or planning to move abroad, it’s best to speak with a CPA and ensure you are fully prepared and understand the tax implications of your move, not just when it comes to managing your Roth IRA!
