Individual Retirement Arrangements (IRAs) for U.S. expats are retirement accounts that allow you to save for retirement with certain tax advantages, such as tax-deferred growth or tax-free withdrawals, depending on the type of IRA. Even though you live abroad, as a U.S. citizen or resident, you remain eligible to contribute to and benefit from IRAs, provided you meet the IRS requirements.
There are two main types of IRAs that U.S. expats can use:
1. Traditional IRA
A Traditional IRA allows you to contribute pre-tax income, meaning the contributions are tax-deductible in the year you make them, subject to certain limits. The funds in the IRA grow tax-deferred until you begin withdrawing them, at which point you will pay taxes on the distributions.
Key Features for U.S. Expats:
- Tax Deduction: Contributions to a Traditional IRA are typically deductible from your taxable income, lowering your current U.S. tax bill. However, if you contribute to a Foreign Pension Plan or other retirement account in your host country, your deduction might be limited or reduced.
- Eligibility: You can contribute to a Traditional IRA if you have earned income from U.S. or foreign sources. If you're covered by a foreign employer's pension plan, this might affect your deduction eligibility.
- Contribution Limits (for 2023): The contribution limit is $6,500 per year, or $7,500 if you're over 50. Contributions are limited to the lesser of this amount or your earned income for the year.
- Tax Deferral: Your investment grows tax-deferred until you take distributions (typically after age 59½). However, distributions are taxed as ordinary income when you take them.
- Required Minimum Distributions (RMDs): You must start taking RMDs by age 73. These distributions are taxed as ordinary income.
- Expat Considerations: The IRS requires that you file annual reports about foreign bank accounts, investments, and pension plans (FBAR, FATCA). If you have foreign retirement accounts, special considerations may apply to avoid double taxation and ensure that your IRA does not violate local laws.
2. Roth IRA
A Roth IRA works differently from a Traditional IRA in that you make contributions with after-tax dollars, meaning you do not get a tax deduction for your contributions. The benefit is that qualified withdrawals in retirement are tax-free, including any investment growth.
Key Features for U.S. Expats:
- No Upfront Deduction: Contributions are made with after-tax income, so there’s no immediate tax break. However, the benefit comes in retirement when withdrawals (including earnings) are tax-free.
- Eligibility: To contribute to a Roth IRA, you must meet certain income limits:
- For 2023, you can contribute to a Roth IRA if your modified adjusted gross income (MAGI) is less than $138,000 for single filers or $218,000 for married couples filing jointly.
- Contribution Limits (for 2023): Same as the Traditional IRA—$6,500 or $7,500 if over 50—but income limits might prevent you from contributing directly if your income exceeds certain thresholds.
- Tax-Free Growth: The main advantage is that, while contributions are made with after-tax money, the earnings in the account grow tax-free, and qualified withdrawals (after age 59½ and having the account for at least 5 years) are also tax-free.
- No RMDs: Roth IRAs do not require Required Minimum Distributions (RMDs), meaning you can leave the money in the account to grow tax-free for as long as you like.
- Expat Considerations: If you’re a U.S. expat and contribute to a Roth IRA, you’ll need to pay close attention to whether your host country has specific tax rules that affect your Roth IRA or whether they tax foreign-sourced income. Some countries may tax the distributions you receive from a Roth IRA, but the U.S. will still provide the tax-free benefit.
3. Contribution Rules for U.S. Expats
- Earned Income: In order to contribute to an IRA (whether Traditional or Roth), you need to have earned income (wages, salary, self-employment income). Investment income, such as dividends or capital gains, does not count.
- Foreign Earned Income Exclusion (FEIE): If you use the Foreign Earned Income Exclusion (FEIE) to exclude some or all of your foreign earned income, you cannot use that excluded income to contribute to a Traditional or Roth IRA. However, if you have other income (such as from self-employment or rental properties), you can still contribute.
- Self-Employment Income: If you're self-employed, you may have additional options for contributing to retirement accounts, such as a SEP IRA (Simplified Employee Pension) or a Solo 401(k), which may allow higher contribution limits.
4. Reporting Requirements for U.S. Expats with IRAs
- FBAR (Foreign Bank Account Report): If you have foreign bank accounts that hold your IRA investments (which is rare but possible), you may need to file the FBAR (FinCEN Form 114) to report foreign financial accounts if the total value exceeds $10,000.
- FATCA (Foreign Account Tax Compliance Act): The IRS Form 8938 may also apply if you have foreign financial assets. This form is required to report foreign accounts or foreign financial assets in certain situations.
5. Other Considerations for U.S. Expats with IRAs
- Foreign Tax Considerations: Some countries may tax your IRA distributions differently than the U.S. does. It's important to understand the tax rules in your host country to determine if you will face double taxation on your IRA income or if you can claim a Foreign Tax Credit.
- Double Taxation Avoidance: The U.S. has tax treaties with many countries that can help reduce the risk of double taxation. However, tax treaties can be complex, so it’s important to consult with a tax professional to understand how these treaties apply to your retirement accounts.
- Currency Exchange: If your IRA investments are in foreign assets, fluctuations in the exchange rate could affect the value of your IRA holdings when converted to U.S. dollars for tax reporting purposes.
6. IRA Rollovers and Foreign Retirement Accounts
- If you are a U.S. expat who has a foreign retirement account (e.g., a pension or 401(k)-style plan from your host country), you may be able to roll over some of those funds into a U.S. IRA. However, there are specific rules and restrictions governing rollovers, and you should seek professional advice to ensure compliance.
- Conversely, you may be required to report your foreign retirement accounts to the U.S. government (through FBAR and FATCA).
