Can US-UK citizen resident in UK set up a Roth IRA?

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RothIRAHelp
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Joined: Sun Sep 19, 2021 2:51 pm

Can US-UK citizen resident in UK set up a Roth IRA?

Post by RothIRAHelp »

I am a US-UK citizen resident in the UK. I have a Vanguard US brokerage account which I use to purchase ETFs with UK HMRC reporting status (VOO and VTI).

I was recently told I should set up a Roth IRA for the tax benefits. My question is: can I set up a US Roth IRA, or will this be subject to taxation by the UK?

Many thanks for help and advice!
TedSwippet
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Location: UK

Re: Can US-UK citizen resident in UK set up a Roth IRA?

Post by TedSwippet »

Welcome.
RothIRAHelp wrote: Sun Sep 19, 2021 2:55 pm My question is: can I set up a US Roth IRA, or will this be subject to taxation by the UK?
Roth IRAs are protected from UK tax under the US/UK treaty, specifically article 18 paragraph 1 and article 17 paragraph 1(b). (Note the asymmetry -- UK ISAs are not protected from US tax.)

How do you plan to fund this IRA? As I understand it, it can be difficult if you use the FEIE to reduce or eliminate US tax on your UK earnings. Explained somewhat in the article linked below. I'm not a US citizen, so no direct experience.

IRA Contribution Rules for Expats Explained
occambogle
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Joined: Thu Dec 12, 2019 3:58 am

Re: Can US-UK citizen resident in UK set up a Roth IRA?

Post by occambogle »

Also, if you are a higher-income person and not directly eligible to contribute to a Roth IRA directly because of that, you can also look at whether you may be eligible to contribute to a Backdoor Roth....

https://www.bogleheads.org/wiki/Backdoor_Roth
tubaleiter
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Joined: Tue Mar 09, 2021 11:58 am

Re: Can US-UK citizen resident in UK set up a Roth IRA?

Post by tubaleiter »

Yes, you can set up a Roth IRA and it will be protected from UK tax by the US/UK tax treaty. A few challenges/caveats:

1. You must have EARNED income to contribute to an IRA, from the US perspective. If you use the Foreign Tax Credit and earn money from a UK job, that's 100% ok. But if you use the Foreign Earned Income Exclusion to exclude all your earned income from your US taxes, you have no earned income to contribute. You can't use income from capital gains, dividends, etc. (as long as the earned income shows on your 1040, money is fungible so it doesn't matter which dollar makes it into your IRA, but there needs to be enough earned income showing). I have heard of people choosing not to exclude enough money to allow for the IRA contribution but use the FEIE for the rest - no direct experience, but seems plausible if slightly complicated.

2. I have seen varying reports as to whether Vanguard will allow you to maintain an account if they know you live outside the US. Presumably you're ok since you have been using your brokerage account, but something to keep in mind if they do find out. The other alternatives are typically Schwab International and Interactive Brokers, both of whom are happy to open IRAs for US citizens abroad.

3. Also if Vanguard finds out you're living in the UK, even if they allow you to continue trading, they will probably not allow you to purchase US ETFs, due to EU (now UK) regulations requiring funds to produce a Key Information Document, which no US funds produce.

4. Because the IRA is protected by the US/UK tax treaty, if Vanguard allows you to buy US funds you don't have to ensure they're HMRC reporting. You might choose to do so for simplicity (being able to hold VOO and VTI in both your taxable and IRA accounts, for example), and there are plenty of good Vanguard ETFs on the list, but you don't HAVE to: https://www.bogleheads.org/wiki/Vanguar ... ting_funds

5. If it crosses your mind to consider a Traditional IRA instead of Roth, AND you want to exclude that income from your UK taxable income, things get murkier - the way some people read the treaty, you would have had to started contributing to the Traditional IRA before leaving the US in order for the UK to respect the deduction. If you stick with Roth, no worries, just a heads up.
occambogle
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Re: Can US-UK citizen resident in UK set up a Roth IRA?

Post by occambogle »

Good info above...

I have heard of people choosing not to exclude enough money to allow for the IRA contribution but use the FEIE for the rest - no direct experience, but seems plausible if slightly complicated.

I can't find the source and could well be wrong but I have a recollection that you can't partially claim the FEIE, it's all or nothing.
Topic Author
RothIRAHelp
Posts: 5
Joined: Sun Sep 19, 2021 2:51 pm

Re: Can US-UK citizen resident in UK set up a Roth IRA?

Post by RothIRAHelp »

Thanks for all the help! So if I:

a) Have no US-earned income; and
b) Intend to use the Foreign Earned Income Exclusion on my UK income so as not to pay US income tax

then I cannot contribute to a Roth IRA? Is there a way to not pay US tax on my income and still contribute?

On the Vanguard brokerage, I was told by Vanguard when setting it up that moving to the UK for work was not a disqualification for maintaining an account. In addition, I believe the KID requirement only applies to UK brokerages selling US-domiciled ETFs (at least, when I spoke to Vanguard US they had never heard of this requirement and said they would sell me ETFs as long as I held an account).

Many thanks again!
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