IRA/Roth IRA

Hi Fellow Yanks!

Can one contribute to an IRA/Roth IRA if your income is higher then the foreign earned income exclusion?  i.e. earn $100,000 exclusion $82.400?  Therefore there is U.S. taxable income?  Or does the income have to be 'earned' in the U.S.?

Thanks,
Shawn

What I can find on the subject says, yes you can.  As long as you are over the foreign earned income exclusion as have U.S. taxable income:

http://www.jamesdance.com/us_expatriates.htm [nofollow]

Still love to hear anyone elses input.

Best
Shawn

Hi Shawn,

From what I have read, I think you are correct. Here is a link that I found when I was looking into this:

http://www.overseastaxservices.com/IRA.html

Watch Out.

One:  Limits are deceiving:

There is an upper limit and a lower limit on deductible and Roth IRA contributions.

The lower limit is $0 wages.  This is your wages less the Foreign Earned Income Exclusion.   If your foreign income is below the $82,400, you can't contribute.  If your income is above this, but you also claim the Foreign Housing Exclusion, you may still drop your wages down to zero.

The upper limit is $95,000 for single, or $150,000 for married.  This is the MAGI (Modified Adjusted Gross Income).  MAGI is your wages, interest, dividends, and all other income, ignoring the Foreign Earned Income Exclusion.  So in your example above, it's $100,000. 

Two:  Is it saving any money?

It may not be deductible in your host country!  Your tax rate there could be much higher than it is in the US - it sure is in the UK!  If your host employer has a tax-deductible pension you could be contributing to or there's another tax-free savings plan in your host country, that could be a better investment.  To get full advice on the tax-advantages of various investments, send me a private email and I will send you my Investment Guide for Americans Abroad.

It's also not all that great an idea in the US.  Your tax in the US should be close to zero after you deduct your Foreign Tax Credits.  Thus, you may be postponing income from a zero- or low-tax year to a year when you will have higher income tax rates (presumably a retirement year in the US).  If it's a regular IRA, that would be poor tax planning.  You'd be better off investing directly in a normal US-based investment (non-tax-advantaged) account, and not face the high taxes upon withdrawal.  If it's a Roth IRA, it's tax-free when you withdraw so it's a fine idea - except for the fact that you probably haven't maximized your tax-free investments in your host country.
Conclusion:

The long and short of it is that this is an investment that has both US and UK tax implications.  You should investigate all your new options available to you rather than jumping straight into the old familiar ones.