Roth IRA and Foreign-Earned Income

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aburr
Posts: 13
Joined: Sun Feb 05, 2017 8:35 pm

Roth IRA and Foreign-Earned Income

Post by aburr »

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 I did some research on the Interwebs and found a few websites supporting this idea, but of course they're a little out of date.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!

sid
Posts: 1115
Joined: Sat Dec 02, 2006 11:44 am

Re: Roth IRA and Foreign-Earned Income

Post by sid »

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.

PsyGuy
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Location: Northern Europe

Response

Post by PsyGuy »

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.

sid
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Joined: Sat Dec 02, 2006 11:44 am

Re: Roth IRA and Foreign-Earned Income

Post by sid »

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.

PsyGuy
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Location: Northern Europe

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Post by PsyGuy »

@Sid

Yes, but it does have an average ROI and a mean, mode, median for the class of investments.

buffalofan
Posts: 259
Joined: Wed Jan 06, 2010 11:08 pm

Re: Roth IRA and Foreign-Earned Income

Post by buffalofan »

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.

sid
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Joined: Sat Dec 02, 2006 11:44 am

Re: Reply

Post by sid »

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.

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