Tax Benefits of Retirement Accounts for Expats

Saving up for retirement investments can take a lot of time and money. Not only do you have to ensure you’ve saved enough, if you retire abroad, taxes can make things even more complicated. If you’re an American expat, you can take advantage of the many U.S. retirement account tax benefits. But before moving abroad, understanding how your retirement funds are affected and how you can access them are key to staying financially afloat.

U.S. Retirement Accounts Still Apply Abroad

As an U.S. citizen or green card holder, you’re required to report and be taxed on worldwide income. And unfortunately includes our retirement income. No matter where you live, your retirement contributions and withdrawals are subject to U.S. tax rules. There are a few accounts that allow for contributions such as:

• Traditional IRAs
• Roth IRAs
• 401(k)s or employer contributed retirement plans

If you’re planning on utilizing the Foreign Earned Income Exclusion (FEIE), your eligibility and contribution limits will be affected. It depends on what your current limits are on your earned income, and how much is going to be excluded.

The FEIE Can Limit IRA Contributions

If your intentions are to exclude all of your income from the U.S. under FEIE, you may not have any “earned income” left to contribute. In order to contribute to a traditional or Roth IRA, you must have taxable earned income after using the exclusion.

For example:
If you earn $100,000 abroad and exclude the full amount using FEIE, you won’t have any eligible income left to fund your IRA. However, if you only exclude $80,000 and leave the remaining $20,000 as taxable income, you can contribute to your IRA based on the remaining amount.

Tax-Deferred and Tax Free Growth (Traditional IRA/ 401(k) vs Roth IRA)

Generally, any contributions you make to a Traditional IRA or 401(k) are tax-deductible in the year you make them. Doing so lets your investments grow tax-deferred, allowing you to avoid paying U.S. taxes until they’re withdrawn in retirement. The benefit is that you may be in a lower tax bracket by then, reducing your tax rate. For expats who still file U.S. taxes every year, this deduction can help reduce your taxable income – potentially lowering the U.S. tax liability each year.

On the other hand, a Roth IRA offers no upfront tax deduction, but your earnings will grow tax-free. Additionally, any qualified withdrawals in retirement are not taxed. If you’re an expat who expects to retire abroad permanently with higher income rates, this can save you hundreds. Especially if they contribute while living in a low-tax or tax-free jurisdiction.

Foreign Pension and Superannuation Plans

Many countries offer plans similar to those in the U.S., but you have to be more cautious. Contributing to or receiving income from these foreign plans are not often recognized by the IRS as a qualified retirement plan, meaning:

• Your contributions might not be tax-deductible in the U.S.
• Earnings inside the plan may be taxable annually
• Withdrawals may be taxed again when distributed

In most cases, tax treaties and totalization agreements between the U.S. and your country of residence can help prevent double taxation. These can affect how contributions are taxed, whether your foreign pension is taxable in both countries, and how social security credits are counted if you split your career between the U.S. and abroad. Before you contribute to any foreign or U.S. plan, review the treaty provisions and regulations closely. Once contributions are made, it’s difficult to go backwards.

Retirement accounts are one of the most important tools for those retiring overseas. Not only do they build wealth, but they can reduce the taxation burden when withdrawing later in life. The key is understanding how U.S. tax rules apply to foreign