As with most financial planning issues for Americans living abroad, retirement planning options can be more limited and more complex than they are when living in the U.S. In most cases, the familiar U.S. employer-sponsored retirement plans like 401(k)s are not available to expats. Foreign employers cannot offer them since they are required to be set up in the U.S., and most U.S. employers don’t offer them, primarily because the company uses a foreign business entity for tax purposes.
What options does that leave to the American living overseas and trying to save for retirement? IRAs, SEP IRAs and Solo 401(k)s for the self-employed, U.S. brokerage accounts, and on a limited basis, tax- deferred annuities, can all proved to be useful tools for American expats to save for retirement. I’ll discuss IRAs, SEP IRAs, and Solo 401(k)s here.
Many Americans think that they cannot continue to contribute to an IRA once they move outside of the U.S., but they can if they have unexcluded earned income. To be clear, it does not matter if it is foreign- sourced or U.S.-sourced income, just that it is unexcluded and earned.
If the earned income is U.S.-sourced, then the FEIE would not apply, and they can contribute to an IRA. In either case, foreign-sourced or U.S.-sourced income, the U.S.-connected person could contribute to a Traditional IRA regardless of income, or to a Roth IRA if the meet the normal Roth income phase out limits https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira- contributions-that-you-can-make-for-2022
It should be noted that if planning on retiring overseas, the U.S.-connected person should consult a qualified international tax advisor to see if the bilateral tax treaty between the U.S. and the country in which they plan to retire recognizes the tax-free withdrawal properties of Roth accounts. Most countries do not.
Solo 401(k)s allow for contributions on a Roth basis, while SEP IRAs do not. Solo 401(k)s can only be established for an U.S.-based entity, while a SEP can be establishes based on earnings from a foreign- registered firm, as well as for U.S.-based companies or earnings.
It is important to consult with a qualified international tax advisor when setting up the self-employed retirement accounts while overseas, as the tax benefits, and strategic decision regarding filing requirements will differ depending on the country of residence. For example, when living in a higher tax country than the U.S., there will be no immediate benefit of a tax deduction for contribution to a SEP when filing U.S. taxes, so contributions are made on an after-tax basis. One strategy would be to file the appropriate IRS form to demonstrate the after-tax character of the contributions, and at a later time convert to a Roth account, without having to pay the tax on the contributions during conversion.
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