US IRA contributions

Hi Folks,

I'm a US citizen, UK resident.  I have a traditional IRA over in the US.  I'd like to make my 2005 contribution to this plan.  The IRS rules say that if you are not in a retirement plan at work, this contribution is totally deductable.  Now, I'm not in a US style plan, but I am in a pension scheme at work here in the UK.  My question is whether the IRS only looks at US style plans when making the deductable/nondeductable evaluation?

Detailed question I know, but it gets at how the US looks at UK pension schemes and whether it assigns equivalencies.

Thanks in advance.

Paul

Paul

1. The UK plan is not a US qualified plan.  Therefore it goes under the rules for non-qualified plans.  Put simply contributions are not deductible in the US and any contributions that your employer makes are taxable on your US tax return as the money is invested.

2. The IRA might be deductible in the UK as a pension contribution under the treaty.  In practice this will not work in your case because you are already a member of a UK employer plan but may help some others.

3. I am not sure why you would want to put anything into an IRA that is not a Roth because after the foreign earned income exclusion and foreign tax credits you are presumbly not paying US taxes on earnings at this point.

Guya,

Thanks for the input.  In my case, even after income exclusion and tax credits, I still owe some US taxes on other US source income.  I also don't qualify for Roth.  Thus a regular IRA contribution would reduce my US tax even further.

You say the US doesn't recognize UK plans as qualified.  In this case however, the US loses out on revenue with this stance.  My paranoid belief has always been to see which answer produces more revenue for the US, and that is usually the right answer.

Paul

Guya,

Thanks for the input.  In my case, even after income exclusion and tax credits, I still owe some US taxes on other US source income.  I also don't qualify for Roth.  Thus a regular IRA contribution would reduce my US tax even further.

You say the US doesn't recognize UK plans as qualified.  In this case however, the US loses out on revenue with this stance.  My paranoid belief has always been to see which answer produces more revenue for the US, and that is usually the right answer.

Paul

If you don't qualify for a Roth, how do you qualify for a regular IRA?  The income limit for Roth is much greater than for a regular IRA.

1. If you owe taxes on other US source income then unless this is other pre-assignment wages I cannot see how contributing to a deductible IRA would reduce US taxes because the contribution would need to be allocated to foreign source earnings and thus reduce foreign tax credits by just as much as the IRA is saving.

2. My recollection is that rules for Roth IRAs and traditional IRAs have different definitions of Modified AGI, so the rules on earnings are different.  I won't have time today to check these out but can look further if this might assist.

A traditional IRA has no income limits to contribute.  There are income limits that decide if the contribution is deductible IF you are already covered by a retirement plan (US?) at work.

So my question is whether a UK plan would cause my contribution to be nondectible.

Paul

Guya,

I don't know what an IRA contribution has to do with wages.  I have some money in a US account.  I'm going to transfer some into an IRA account.  This is not foreign sourced income.  This then gets subtracted directly from my adjusted gross income if its deductible.

Paul

The point that  was making above about requiring wages before making IRA contributions is very well explained in the middle of page 8 (in the right hand column) of the relevant IRS publication.  Compensation for traditional IRA contributions purposes (see page 10) does not include earnings that are excluded from income because they are covered by the foreign earned income and foreign housing exclusions. http://www.irs.gov/pub/irs-pdf/p590.pdf

For many folks therefore it is not possible to contribute to a US tax deductible IRA during a full year while overseas (although of course it may still be possible for the year of move).

(If you want to contribute to a Roth IRA instead you'll have to study the rules on pages 54 onwards because to calculate Modified AGI for Roth purposes one adds back income covered by the foreign earned income and foreign housing exclusions.)

One alternative for a few people might be to claim a UK deduction for permissable IRA contributions under the UK/US tax treaty, but in practice this is only likely to work in very few cases.  If you think you may be one of those then do take advice.

Guya,

I understand that.  In my case I have income from the sale of stock, dividends, interest, etc.  This is not foreign source income and is over and above anything I excluded.  Therefore I have left over income with which to qualify for making an IRA contribution.

In the end I'm still not sure whether I can deduct this contribution.  If I'm wrong, and lets say I make several years of deductible contributions, I could be in for a big tax penalty.

Paul