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IRA Rules and Living Abroad

IRA contribution rules for those living in the U.S. and abroad.

By
Laura Adams, MBA
4-minute read
Episode #111

 

In this episode I’ll share a listener e-mail that asks important questions about the rules for using IRAs to save for retirement.

It’s great to get your listener e-mails; so please keep them coming. Knowing what’s on your minds helps me prepare topics for the show. I try to personally respond to as many questions and comments as I can. Recently there’s been lots of mail about saving for retirement. So I thought I’d share one from a listener named Robin, so everyone can benefit from the information.

"Dear Money Girl, I really enjoy listening to the podcast. I am currently working abroad and am planning on filing a tax return in the U.S. for the income I made from January to June when I was working in the U.S. I recently listened to episode 102 where you talked about some of the eligibility requirements for investing in an IRA. In the episode you say, "The annual maximum amount that you can contribute to a traditional IRA, Roth IRA, or to both is limited by your taxable income, up to $5,000 for 2008. So if you’re a student and will only make $3,000 in 2008, for example, your IRA contributions cannot exceed $3,000.

"I am wondering, if I plan to stay abroad for more than a year, at some point I will have very little taxable income for the U.S. and thus will not be able to contribute to an IRA. Is this correct? Is it possible to contribute $5,000 to a Roth IRA and $5,000 to a traditional IRA in the same year? Is there a difference in the way one would file taxes when one works for an American company abroad, as opposed to a foreign company abroad? Thank you in advance for reading my questions and I hope to hear an episode about this topic."

Paying U.S Taxes While Living Abroad

Robin, thanks for your e-mail. It’s jam-packed with good questions. Let’s first address the issue about paying U.S. taxes when you’re living abroad. If you’re a U.S. citizen or resident alien, your worldwide income is subject to U.S. income tax no matter where you live. So the same rules generally apply for filing tax returns whether you live in the U.S. or not. This is the case even if all of your income is from outside the U.S. This applies to employees and self-employed subcontractors or freelancers. Robin, you didn’t mention your citizenship status, so I’m going to assume that you are a U.S. citizen. If that’s the case, you’ll need to pay U.S. taxes on all the income you earned in 2008, not just the portion you earned from January to June.

However, you may qualify for certain U.S. tax benefits if you meet some requirements while living abroad. You may be able to exclude a limited amount of foreign earned income as well as your housing expense from your total income. You may also be able to claim a deduction or tax credit on your U.S. tax return for any foreign income taxes that you have to pay. I’ll include a link to IRS Publication 54 for full details. This is the Tax Guide for U.S. Citizens and Resident Aliens Abroad. That’ll be in the show notes below.

Investing in an IRA

So back to investing in an IRA: the maximum amount you can invest is limited by your taxable income, up to $5,000 for 2008 and for 2009. And if you’re 50 years of age or older by the end of either tax year, you can contribute $6,000. So as long as Robin makes this much worldwide taxable income she can max out an IRA. In determining compensation for IRA purposes, you use your gross taxable income. This means you don’t subtract out any qualified deductions for foreign earned income or housing that I mentioned.

Robin also asked about contributing to both a Roth and a traditional IRA in the same year. This is fine, as long as the total contribution to all IRA accounts doesn’t exceed her allowable limit. For example, if you have $4,000 in taxable income for 2008, you could invest $1,000 in a traditional IRA and $3,000 in a Roth IRA. But total contributions to all IRAs can not exceed your annual allowable limit.

However, be aware that you can’t contribute to a Roth IRA at all if you make too much money. For those filing as singles and heads of household the income threshold is $116,000. And joint filers can make no more than $169,000. This just applies to Roths — for traditional IRAs there is no income limit placed on contributors.

Robin also asked if it makes a difference for tax purposes whether you work for an American or for a foreign company abroad. It does not make a difference who your employer is when it comes to paying U.S. taxes. As I mentioned, your citizenship status as well as your income level and age determine whether you must file a U.S. tax return.

Administrative

I’m glad you’re listening. If you have a question or comment, send e-mail to money@quickanddirtytips.com. And let me know if you’d like to hear more listener e-mails on the show.

Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.