Roth IRA for American Expatriates

By ZM Ishmurzina

Americans living abroad are puzzled by retirement planning options. Roth IRA has always been a popular retirement account among American expatriates due to its tax-free growth. However, there are a lot of rules that American expats must be aware of before making a contribution. A failure to follow the expat tax requirements and IRA rules can result in penalties.

This is one of many emails that we received from American expatriates. “I am an American expat living in Korea. I contributed to Roth IRA per the advice of a US financial advisor. However, after reading some information on the expat tax blog, I am afraid that I might be subject to penalties. I am really confused. What should I do?”

Let’s review key rules.

Advantages of Roth IRA

  • These contributions grow tax-free.
  • Withdrawal of earnings is tax-free if the account has been open for 5 years and the account holder reached the age of 59 and 1/2.

Who is eligible to contribute to Roth IRA?

American expatriates must review several key things before making a contribution:

  • Yearly income. It is important that American expatriates have earned income if they want to qualify for Roth IRA. Earned income includes salary, wages, bonuses, self-employment income. Pension and social security are not eligible sources of income.
  • Age. There is no age limit for American expatriates. The most important issue is that the person has earned income.

How income is determined before American expats make a contribution?

Modified Adjusted Gross Income (MAGI) is utilized to determine the amount of earned income eligible for this IRA. MAGI is calculated by taking adjusted income and adding back deductions like student loan interest, higher education expenses etc (the list is extensive).

What are contribution limits?

  • American expats with income over $125,000 (filing status is single) and $183,000 (filing status is joint) are not eligible to contribute in 2012.
  • American expatriates with income over $127,000 (filing status is single) and $188,000 (filing status is joint) are not eligible to contribute in 2013.

What is the maximum amount of contribution?

  • The contribution amount cannot exceed the earned income for a tax year.
  • Tax Year 2012 – $5,000 per year ($6,000 if you are age 50 or older)
  • Tax Year 2013 – $5,500 per year ($6,500 if you are age 50 or older)

Conclusion

American expatriates should review the amount of foreign earned income as well as the amount of all exclusions that they take before they contribute to Roth IRA.

US citizens and green card holders should contact an expat tax CPA if they have questions about Roth IRA, the eligibility, the maximum amount of contribution, overseas taxes, FBAR, FBAR or need help with US expatriate tax preparation. International tax experts at Artio Partners are here to help you.