I've been doing tons of research on this topic and, long story short, found out that foreign-earned income cannot be used to fund a Roth IRA. For those who somehow don't know, a Roth IRA is one of the best investment vehicles for your retirement. Sadly, this I think is only available to US expats. I would assume England and other countries has something similar, but in any case I'm an American so I've only looked up info on American investment opportunities.
Anyway, I found a back-door way to fund it using foreign-earned income that according to our tax expert is perfectly legal. It's actually very simple. Fund a traditional IRA with your foreign-earned income and then roll that money over to your Roth. The money gets reported as income, but due to the $24,000 or so dollars of standard deduction, it gets written off and you pay no taxes on it. The important thing to note is that you CANNOT use the foreign-earned income exclusion on the money you invest in the Roth because the exclusion makes it look like to the US govt that you are not reporting any earnings (or something like that). You must use the standard deduction on the money you rollover to the Roth.
What does everyone think? Does this sound legal? I did some research on the Interwebs and found a few websites supporting this idea, but of course they're a little out of date. I would love if some other IE's talked to their tax people and we could try to figure this out together. Thanks!
Roth IRA and Foreign-Earned Income
Re: Roth IRA and Foreign-Earned Income
Before you can fund a traditional IRA, you have to earn ABOVE the foreign earned income exclusion. Anything earned over that exclusion can be put into an IRA. But that’s a high income bar that most expat teachers won’t reach.
Response
Concur with @Sid the threshold makes it impractical and if there are ITs with that level of coin for investment a Roth IRA isnt that attractive considering ROI, and while a ROTH IRA is a strong vehicle when in the USA, ITs arent limited to investment products in the USA, an IT with that level of coin has better options available and even below that threshold there are comparable investment products.
If you want to invest in a Roth IRA just cycle the coin that you want to do it with through your own company.
If you want to invest in a Roth IRA just cycle the coin that you want to do it with through your own company.
Re: Roth IRA and Foreign-Earned Income
You do realize that an IRA isn't a single thing with a single ROI, right? You can put any sort of (legal in the US) investment in there. Even actual real estate. Non-US investments.
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buffalofan
- Posts: 350
- Joined: Wed Jan 06, 2010 11:08 pm
Re: Roth IRA and Foreign-Earned Income
Sorry, but NO. Does your "tax expert" have knowledge about USA expat tax issues? Because most of them that are based in the USA do not. You can't fund an IRA unless you either (1) make more than the FEIE threshold of 105,000 after the standard deduction (good luck with that if you are a teacher), or (2) you take the foreign tax credit instead of the FEIE (only makes sense if you work in a high tax country and your employer doesn't equalize your taxes). But if you take the foreign tax credit and revoke the FEIE, you can't use the FEIE again for 5 years - which could really screw you if you move to a place with low/no taxes.
Re: Reply
PsyGuy wrote:
> @Sid
>
> Yes, but it does have an average ROI and a mean, mode, median for the class
> of investments.
There is no “it”. IRA is not one thing. It is every sort of investment from highly speculative to plain old savings account.
I suppose in theory one could add up the contents of every IRA in existence and compute average ROI etc, but this would be pointless. Rather like computing the average square meterage of every abode, house, apartment, hut, yurt, homeless sidewalk plot and mansion everywhere in the world, and claiming this number to be relevant.
> @Sid
>
> Yes, but it does have an average ROI and a mean, mode, median for the class
> of investments.
There is no “it”. IRA is not one thing. It is every sort of investment from highly speculative to plain old savings account.
I suppose in theory one could add up the contents of every IRA in existence and compute average ROI etc, but this would be pointless. Rather like computing the average square meterage of every abode, house, apartment, hut, yurt, homeless sidewalk plot and mansion everywhere in the world, and claiming this number to be relevant.
Reply
@Sid
Yes it is, its not a who, where or when that makes it a what, and an amalgamation of its is still an it.
Yes, one could do that, but that would be mu (μ) or the central tendency of the arithmetic mean for a population (of investments). I didnt write that I wrote mea , as in a sample or representation of a populations arithmetic average and other sample representation measures of central tendency. Such as comparing one class of investments in a portfolio comprised largely of property in a Roth IRA as opposed to another class of investments in a portfolio comprised predominately of stocks, of which such comparisons are not just meaningful in their utility but such comparisons critical in developing an investment strategy.
Yes it is, its not a who, where or when that makes it a what, and an amalgamation of its is still an it.
Yes, one could do that, but that would be mu (μ) or the central tendency of the arithmetic mean for a population (of investments). I didnt write that I wrote mea , as in a sample or representation of a populations arithmetic average and other sample representation measures of central tendency. Such as comparing one class of investments in a portfolio comprised largely of property in a Roth IRA as opposed to another class of investments in a portfolio comprised predominately of stocks, of which such comparisons are not just meaningful in their utility but such comparisons critical in developing an investment strategy.
Re: Roth IRA and Foreign-Earned Income
Mu yourself.
Maybe later we can go out and take a tally of the prices of all the items for sale in an Asian megamall, from the smallest single piece of candy up to the $3,000,000 luxury condo. Surely the average of those numbers would be useful in knowing how much cash to shove in our pockets before our next shopping trip.
Or, since you prefer just looking at one basket, we could take the average price of the items just in the supermarket in the megamall, even though an IRA is a megamall, not one store.
Maybe later we can go out and take a tally of the prices of all the items for sale in an Asian megamall, from the smallest single piece of candy up to the $3,000,000 luxury condo. Surely the average of those numbers would be useful in knowing how much cash to shove in our pockets before our next shopping trip.
Or, since you prefer just looking at one basket, we could take the average price of the items just in the supermarket in the megamall, even though an IRA is a megamall, not one store.
Re: Response
PsyGuy wrote:
> Concur with @Sid the threshold makes it impractical and if there are ITs
> with that level of coin for investment a Roth IRA isnt that attractive
> considering ROI, and while a ROTH IRA is a strong vehicle when in the USA,
> ITs arent limited to investment products in the USA, an IT with that level
> of coin has better options available and even below that threshold there
> are comparable investment products.
>
> If you want to invest in a Roth IRA just cycle the coin that you want to do
> it with through your own company.
Could you elaborate on some of those better/comparable options (for ITs below that threshold in particular)? Genuinely curious. I know there are pensions in Europe, and QSI has a pension, but that's all I really know about.
> Concur with @Sid the threshold makes it impractical and if there are ITs
> with that level of coin for investment a Roth IRA isnt that attractive
> considering ROI, and while a ROTH IRA is a strong vehicle when in the USA,
> ITs arent limited to investment products in the USA, an IT with that level
> of coin has better options available and even below that threshold there
> are comparable investment products.
>
> If you want to invest in a Roth IRA just cycle the coin that you want to do
> it with through your own company.
Could you elaborate on some of those better/comparable options (for ITs below that threshold in particular)? Genuinely curious. I know there are pensions in Europe, and QSI has a pension, but that's all I really know about.
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santacruzin1
- Posts: 22
- Joined: Mon Dec 07, 2015 6:30 am
Re: Roth IRA and Foreign-Earned Income
I think you might be over-complicating the issue OP. You've got 2 options to not be double-taxed by the USA, either:
1. Foreign Earned Income Exclusion (FEIE)
or
2. Foreign Tax Credit (FTC)
Option #1 means you don't pay income tax on income up to $105,900; your income is "excluded" from taxation. However, because this means you effectively have $0 taxable income, you cannot fund either an IRA or a Roth IRA with any of that excluded income. No retirement account for you, you'd just have to use a regular brokerage account to buy/sell stocks, bonds, ETFs or whatever you would have held in the IRA. You also miss out on tax credits & deductions by taking the FEIE. If your income is tax-free, or you don't pay foreign income taxes for whatever reason, then this is probably the best for you.
Option #2 means you *do* allow your foreign income to count as USA-taxable income, but you then get a tax credit equal to the amount of personal income tax you paid to a foreign country. Obviously this only works if you do, in fact, pay income tax to a foreign country and can document this. Taking the FTC makes you eligible to contribute to a IRA/Roth IRA, and eligible for other tax credits as well, some of which are refundable like the Additional Child Tax Credit *because your income has not been excluded from Federal taxes*. That means you would likely not pay any Federal income taxes and might be eligible for a refund depending on your situation.
Option #2 is good if you live/work in a country with higher marginal tax rates than the USA, as your tax liability in that country will always be higher than your USA tax liability. NOTE, taking the FTC means you normally cannot take the FEIE again for 5 years, but there are some exceptions for this like if you got a promotion/raise, or moved to a new country; you have to write a letter explaining this to the IRS though.
More useful info here: https://www.thebalance.com/ira-for-work ... ad-3193218 and here: https://www.taxesforexpats.com/expat-ta ... redit.html. This is just the knowledge that I've gained doing my own taxes; you really should ask a CPA for the best & most accurate advice for your personal financial situation.
1. Foreign Earned Income Exclusion (FEIE)
or
2. Foreign Tax Credit (FTC)
Option #1 means you don't pay income tax on income up to $105,900; your income is "excluded" from taxation. However, because this means you effectively have $0 taxable income, you cannot fund either an IRA or a Roth IRA with any of that excluded income. No retirement account for you, you'd just have to use a regular brokerage account to buy/sell stocks, bonds, ETFs or whatever you would have held in the IRA. You also miss out on tax credits & deductions by taking the FEIE. If your income is tax-free, or you don't pay foreign income taxes for whatever reason, then this is probably the best for you.
Option #2 means you *do* allow your foreign income to count as USA-taxable income, but you then get a tax credit equal to the amount of personal income tax you paid to a foreign country. Obviously this only works if you do, in fact, pay income tax to a foreign country and can document this. Taking the FTC makes you eligible to contribute to a IRA/Roth IRA, and eligible for other tax credits as well, some of which are refundable like the Additional Child Tax Credit *because your income has not been excluded from Federal taxes*. That means you would likely not pay any Federal income taxes and might be eligible for a refund depending on your situation.
Option #2 is good if you live/work in a country with higher marginal tax rates than the USA, as your tax liability in that country will always be higher than your USA tax liability. NOTE, taking the FTC means you normally cannot take the FEIE again for 5 years, but there are some exceptions for this like if you got a promotion/raise, or moved to a new country; you have to write a letter explaining this to the IRS though.
More useful info here: https://www.thebalance.com/ira-for-work ... ad-3193218 and here: https://www.taxesforexpats.com/expat-ta ... redit.html. This is just the knowledge that I've gained doing my own taxes; you really should ask a CPA for the best & most accurate advice for your personal financial situation.
Reply
@sid
We could do that it would give us an indication of the health of the market. e could look at one basket, but e could add other baskets and compare them, e could aggregate baskets and compare their average as ell. The former are interesting and useful, the latter useful and critical.
@idonteven
First, the problem with IRAs, is your still being taxes. Sure they have varying tax benefits and tax advantages but your still paying taxes. In a traditional IRA you pay taxes on withdrawals but get to deduct your contributions. The tax benefit here is that your presumably using and needing less income later in life because you have you on your home and your vehicles and your kids are out of Uni and moved out. In a Roth IRA you pay the taxes on contributions but get to make tax free withdrawals. Youre still being taxed.
An option might be looking at a simple investment such as a target date fund that you open in HK. HK has no capital gains tax and the US sees such income as normal earned income but you get to benefit from foreign tax deductions/exclusions/credit as regular income, so unless your making 6 figure withdrawals youre not paying US taxes on the withdrawals and your not paying capital gains taxes in HK either. You also dont have to live in HK to open such an account, you can live somewhere very economical with a low cost of living.
@aburr
If you use the foreign tax credit your income is whatever you say it is, you can claim just enough income to cover whatever your IRA investment is going to be. You can usually make this small enough that you can get this under the threshold for tax liability.
We could do that it would give us an indication of the health of the market. e could look at one basket, but e could add other baskets and compare them, e could aggregate baskets and compare their average as ell. The former are interesting and useful, the latter useful and critical.
@idonteven
First, the problem with IRAs, is your still being taxes. Sure they have varying tax benefits and tax advantages but your still paying taxes. In a traditional IRA you pay taxes on withdrawals but get to deduct your contributions. The tax benefit here is that your presumably using and needing less income later in life because you have you on your home and your vehicles and your kids are out of Uni and moved out. In a Roth IRA you pay the taxes on contributions but get to make tax free withdrawals. Youre still being taxed.
An option might be looking at a simple investment such as a target date fund that you open in HK. HK has no capital gains tax and the US sees such income as normal earned income but you get to benefit from foreign tax deductions/exclusions/credit as regular income, so unless your making 6 figure withdrawals youre not paying US taxes on the withdrawals and your not paying capital gains taxes in HK either. You also dont have to live in HK to open such an account, you can live somewhere very economical with a low cost of living.
@aburr
If you use the foreign tax credit your income is whatever you say it is, you can claim just enough income to cover whatever your IRA investment is going to be. You can usually make this small enough that you can get this under the threshold for tax liability.