Traditional IRA Rules for American Expats Living Abroad

By ZM Ishmurzina

Individual Retirement Account or IRA is one of the popular retirement options among US taxpayers. We receive multiple questions from our clients, American expats living abroad, about IRA eligibility requirements and contribution limits. Earlier we wrote an article about Roth IRA for American expats. The purpose of this guide is to provide a summary of the most popular questions about IRA. For any additional questions, please contact expat tax CPA at Artio Partners.

Individual Retirement Account or IRA rules for American Expats Living Abroad

What is a Traditional IRA account?

A Traditional IRA is an individual retirement account that provides an opportunity for qualified US taxpayers, including American expats to make tax-deferred and possibly tax-deductible contributions.

What are the benefits of a Traditional Individual Retirement Account?

Interest income, dividends and capital gains accumulated in a Traditional IRA grow tax-deferred so the compounding factor increases an IRA balance and helps investments grow faster. For example, an American expat opened his IRA at the age of 25 and he contributes $5,500 a year. If the average annual return per year is 6%, then he will accumulate $902,262 by the age of 65. However, if during his lifetime he paid taxes at the rate of 25% on his savings, then he will have only $615,157 by the age of 65. Some contributions to an individual retirement account can be tax deductible too.

What is the age requirement for American expats who want to contribute to an IRA?

Any individual who has not reached 70 ½ years at the end of the tax year can make a contribution to an individual retirement account as long as s/he has earned income.

What is considered earned income to determine an eligibility for contribution to an IRA?

American expats must have earned income in order to meet the eligibility requirements and to contribute to an Individual Retirement Account. Earned income includes compensation, wages, salary, tips, bonus, nonemployee compensation etc. Passive income like dividends, interest, capital gains and rental income is not considered for IRA purposes.

How is earned income determined for American expats working abroad?

Earned income is calculated after taking the foreign earned income exclusion and foreign housing exclusion. If earned income is zero, then a contribution is not allowed.

Can a taxpayer make a contribution to a Traditional IRA for a spouse?

If a taxpayer earned sufficient income to cover both contributions, then s/he can make a contribution for a spouse in the full amount for a tax year.

How much is the maximum amount of contribution per year to a Traditional IRA?

Individuals including American expats living abroad can contribute 100% of earned income up to $5,500 for 2013. The maximum amount of contribution is $6,500 for taxpayers who are 50 years or older at a tax year. Contribution limit is adjusted annually.

What is the deadline to make a contribution to an Individual Retirement Account?

US taxpayers including American expats can make a contribution until a regular due date of US tax returns. The deadline is April 15. It gives a lot of time for US taxpayers to make a last-minute decision and contribute to an IRA. American expats get an automatic extension until June 15 to file a US tax return.

Can a taxpayer own several Individual Retirement Accounts?

Any individual who meets the requirements can own several individual retirement accounts. However, the aggregate amount of contributions to all  Individual Retirement Accounts cannot exceed the maximum amount of contribution per year.

Can an American expat living abroad contribute both to a Roth IRA and Traditional IRA?

Maximum amount of contribution to a Roth IRA account is the same as for a Traditional Individual Retirement Account. However, the aggregate amount of contribution to both accounts cannot exceed $5,500 for 2013 or $6,500 for taxpayers 50 years and older.

Can a US taxpayer contribute both to an employer-sponsored plan and an IRA at the same time?

Yes, US taxpayers can make a contribution to the workplace plan and IRA. However, they will not be able to deduct the entire amount of an IRA contribution on US expatriate tax returns.

Who can deduct a contribution to an individual retirement account on US expatriate tax returns?

One of the key advantages of a Traditional IRA contribution is a possibility of a tax deduction. American expats can deduct the entire amount of contribution if a taxpayer and spouse do not participate in employer-sponsored retirement plan. If American taxpayers are active participants in an employer retirement plan, then the maximum amount of contribution is phased out for single filers with Modified Adjusted Gross Income between $59,000 and $65,000. For taxpayers filing Married jointly this phase-out range is $95,000 to $115,000 for 2013 if a spouse makes a contribution to an IRA and employer-sponsored plan. This phase-out range is between $178,000 and $188,000 if a spouse makes a contribution to a Traditional IRA but s/he is not covered by a retirement plan at work. To get more information, please read the IRS publication.

Do you need help with IRA contributions and US expat taxes?

Americans living abroad with additional questions about an IRA contribution are advised to contact an expat tax CPA that specializes in international tax issues.