Until now, I had been contributing to my IRA in The U.S. as a way to have some retirement money going. I’ve recently found out through my sister-in-law who is a CPA that it is illegal for me to be making IRA contributions because my income is foreign earned. Oops! I already did it last year. Will the IRA get me later in life when I try to withdraw? What is the penalty?
Now, I’m stumped. I’m not especially good with finances. I had my IRA with a mutual fund company that was recommended to me (American Century). What’s the next best retirement savings plan for someone who isn’t gifted at reading the stock markets?
I better look into that as well. I thought that as long you did your taxes and make over the amount you’ve put in it’s OK. Otherwise I’d assume a gift from “a friend” or something would be OK to invest as long as you put it in your taxes.
I’ve been putting in too and I have no idea. I’ll email my tax person. It’s probably best I figure this out now and not later.
Is it a Roth or Traditional? Foreign income contributions can be made to a Roth IRA with little or no trouble, just keep an American mailing address. After 10 years everything is water under the bridge. I’ve lost the link to the IRS publication that outlines exactly what income can and can not be put into a Roth IRA and foreign income was exceptable. The IRS guy at AIT, who comes yearly, was also stumped and told me to look it up myself. I did and you can still contribute to a Roth IRA if you have income in taiwan, just make sure to declare your income with a 1040.
Thanks for the info, guys. I was reading through the IRS Website, and I think I’m OK to make contributions (I’ve got a Roth), but I’m still feeling a bit shaky, so I emailed the IRS email help. When I receive a reply (which may take time this time of year), I will certainly post the result here.
Well, the IRS seems to say that we cannot do it. Here is my question and the reply I received:
Your Question Was:
I ve read a lot of the info, but I’m still not clear on whether a
U.S. citizen whose income is 100% foreign earned can make
contributions to IRAs. I have a Roth IRA in the U.S., but live and
work in Taiwan. My income is about $20,000 US a year, so I am clearly
under the $80,000 income exclusion. Can I still contribute the $4,000
for 2004 to my Roth IRA? Thank you so much for your assistance.
The Answer To Your Question Is:
Dear Taxpayer,
Thank you for your inquiry. Publication 590 contains IRA
information. You may access Publication 590 directly from our web
site WWW.IRS.GOV. In order to contribute to any IRA, you must have
taxable compensation. That means taxable in the United States. I have
copied the following for you from Publication 590.
“General Limit
The most that can be contributed to your traditional IRA is the
smaller of the following amounts:
$3,000 ($3,500 if you are 50 or older; for 2005, $4,000 or $4,500, if
50 or older), or
Your taxable compensation (defined earlier) for the year”.
I was not clear as to whether your $20,000 U.S. income will be
under the excluded limit or in excess of the limit. [color=red]If your taxable
income falls below the excluded limits, you are not able to make any
type of an IRA contribution unless you are married filling jointly
with a spouse who will have taxable compensation. [/color]There are also
other contribution rules that you may read about in Publication 590.
I have only addressed the taxable compensation portion of the
contribution rules.[quote]
[color=violet]Uh Oh. Why such conflicting info from tax advisors? Could the rules have changed in the past year or two? I’ll also check with American Century, the company that manages my Roth IRA. In the meantime, if anyone checks again with someone different, let us know if they shed any more (or more recent info on the subject![/color]
Do Worksheet 2-1 using your actual numbers or reasonable estimates of your numbers. It’ll tell you the answer you are looking for. Let me know if you still reach the conclusion that you can’t contribute to the Roth IRA.
By the way, the link I provided in the post above also mentioned doing this worksheet (the only difference is the page numbers have changed slightly over the years).
Thanks I’ve been reading a lot of books set in Belfast lately. I’d think post 9-11 there would be more culturally sensitive abbreviation for such a thing.
Do Worksheet 2-1 using your actual numbers or reasonable estimates of your numbers. It’ll tell you the answer you are looking for. Let me know if you still reach the conclusion that you can’t contribute to the Roth IRA.[/quote]
That worksheet is for figuring out whether you qualify to contribute to an IRA. The next hurdle is what is the contribution limit? That limit cannot be more than your taxable earned income. If you use the Foreign Earned Income Exclusion and make less than the exclusion limit then you will not have any taxable earned income. That’s the catch that most expat Americans run into.
I’ve read one place that you can reduce your excluded income by the amount you wish to contribute to the IRA. E.g. if you make $25k and want to contribute $4k to an IRA, then you only take $21k as your exclusion. If this keeps your income below the standard deduction then it should result in no taxation, but is counted as taxable income.
Two caveats to that, though. First, if you want to contribute to a traditional IRA and your taxable income is below the standard deduction, then there is no tax benefit of a contribution, since you aren’t deducting it from anything. In this case you should use a Roth IRA instead. The second caveat is that I’ve read elsewhere that if you don’t use your Foreign Earned Income Exclusion then you can no longer use it for the following five tax years. I’ve not yet found a clarification if this applies to not using it at all versus using less of it than you could have.
Thanks, jlick. I had another look at the publication 590, and it seems you’re right. I read the top part of the right column of page 7 of the publication, and it says excluded income does not count as compensation for the purposes of contributing to an IRA. I’m going to try and look into this more when I get the chance.