opening a Roth IRA from abroad as an expat

[Runner3891]

Hi All,

I have a question about establishing and contributing into a new Roth IRA as an American expat. I've never had a Roth and have lived abroad for many years. Up until this year, I had no U.S. based income (income earned in the USA) and my international school salary always fell under the foreign earned income exclusion (FEIE), so I know I couldn't contribute to a Roth. However, I am now doing some online work as a part-time W2 employee for a business in the U.S., which will help contribute to Social Security. Because this is U.S. based salary for which I will pay all appropriate taxes on, can I open a Roth IRA with that portion of my salary (the salary from the USA)?

I'd appreciate some feedback from those in the know (yes, I will consult my tax guy about this but I am hoping for some unformed decisions here first).

[plats]

Technically, if you’re doing the work while overseas, that income would still fall under the FEIE. If you entered on your 2555 that you were in the USA two weeks here, three weeks there, etc., you could possibly fly under the radar by appearing to have done the work while in the USA. I wouldn't recommend it.

[typical.investor]

How are taxes in your country of residence? High? If so, you could try not claiming the FEIE, then claiming foreign tax credit for foreign tax paid. This only works if rates are higher. And once you don't claim FEIE, you can't claim it again for five years.

Also, how does your country of residence view ROTHs? Will they tax it? They might!

[EddyB]

In addition to the prior comments about better understanding the sourcing of your income, the irrelevancy of sourcing for IRA eligibility, the potential advantages of using FTCs rather than the FEIE, and the impact on residence-country taxes, be aware that your country of residence may be a determining factor in whether any given custodian is willing to open an IRA for you. Interactive Brokers is generally a good choice for expat US investors, but they appear to be unwilling to open IRAs for residents of some countries. Look around to see if it’s a real possibility before you jump through any hoops.

[ivk5]

Continuing to digress from OP's question, does employer know you are living/working outside the US? In addition to issues noted above, employer may have unaddressed tax risk (permanent establishment risk).

[Runner3891]

Thanks for the responses so far. Not to get too detailed but I have my investment accounts registered to my U.S. based address and thus, nothing is reported to my host country in terms of my investments (nor will they ever be). I don't pay taxes in my host (residence) country (to be clear I report all my income in the U.S. in my yearly tax returns) as my employer takes care of my local (host country) taxes. My U.S. based employer is aware I am living outside the U.S. and it is no issue for them as it is an online position.

[typical.investor]

Thanks for the responses so far. Not to get too detailed but I have my investment accounts registered to my U.S. based address and thus, nothing is reported to my host country in terms of my investments (nor will they ever be). I don't pay taxes in my host (residence) country (to be clear I report all my income in the U.S. in my yearly tax returns) as my employer takes care of my local (host country) taxes. My U.S. based employer is aware I am living outside the U.S. and it is no issue for them as it is an online position.

Ok. First hurdle cleared. Your US broker will open a ROTH for you. Check.

Next is a Yellow triangle or probably red X. Taxable US income.

The IRS considers work as taxed where it is done. With the work at home boom, this is well documented for those living in a different state than their employer. So income from the U.S. based employer is still foreign income. I don't believe it matters if you are W-2 or a 1099-NEC (independent contractor). Someone suggested trying to do the work on visits back home. You'd have to cite that on your 2555 -days on business in the US.

You can't exclude some foreign income under FEIE and leave some US taxable. You'd have to do the work in the US.

The penalty for over contribution is 6% per year until the excess is removed. And then I think there is a 10% penalty on any "earnings".

As for trying to claim foreign taxes paid as a credit, and making all your salary US taxable - ask your tax guy. If you get a statement of compensation including taxes paid, perhaps he could figure out if it's advantageous. It often only works in places like Germany or Denmark.

Note: it probably seems like the W-2 should be US source income because you are paying social security taxes, but it doesn't matter. If you are self employed overseas, you still have to pay them. You can opt out by getting proof you are already paying into the country of residence's system (might only be for totalization agreement countries) though.

[Runner3891]

Ok. First hurdle cleared. Your US broker will open a ROTH for you. Check.

Next is a Yellow triangle or probably red X. Taxable US income.

The IRS considers work as taxed where it is done. With the work at home boom, this is well documented for those living in a different state than their employer. So income from the U.S. based employer is still foreign income. I don't believe it matters if you are W-2 or a 1099-NEC (independent contractor). Someone suggested trying to do the work on visits back home. You'd have to cite that on your 2555 -days on business in the US.

You can't exclude some foreign income under FEIE and leave some US taxable. You'd have to do the work in the US.

The penalty for over contribution is 6% per year until the excess is removed. And then I think there is a 10% penalty on any "earnings".

As for trying to claim foreign taxes paid as a credit, and making all your salary US taxable - ask your tax guy. If you get a statement of compensation including taxes paid, perhaps he could figure out if it's advantageous. It often only works in places like Germany or Denmark.

Note: it probably seems like the W-2 should be US source income because you are paying social security taxes, but it doesn't matter. If you are self employed overseas, you still have to pay them. You can opt out by getting proof you are already paying into the country of residence's system (might only be for totalization agreement countries) though.

Thanks for the feedback! Very helpful! The main reason I am taking on this additional part-time U.S. based job, is so that I can contribute to Social Security (I'm just below the 40 quarter hours necessary to be vested). So I was looking at the potential to start contributing into a Roth as a sort of bonus. Looks like I'll scrap the Roth plans and continue contributing to my Index Funds instead.

[EddyB]

Thanks for the responses so far. Not to get too detailed but I have my investment accounts registered to my U.S. based address and thus, nothing is reported to my host country in terms of my investments (nor will they ever be). I don't pay taxes in my host (residence) country (to be clear I report all my income in the U.S. in my yearly tax returns) as my employer takes care of my local (host country) taxes. My U.S. based employer is aware I am living outside the U.S. and it is no issue for them as it is an online position.

Ok. First hurdle cleared. Your US broker will open a ROTH for you. Check.

In the “what they don’t know, won’t hurt them” sense? I have some long-standing US brokerage accounts (with a US mailing address) and a non-US brokerage account. If I try to open a new account with any of them, they ask me to certify my residency, not just provide a mailing address.

You can't exclude some foreign income under FEIE and leave some US taxable. You'd have to do the work in the US.

I don’t use the FEIE, but I’ve seen this comment before. Why is that? Why can’t one take the FEIE only with respect to a portion of qualifying income? I’m not at all suggesting you’re wrong, but I’ve never noticed something official about it (like I said, I don’t use the FEIE, but it’s hard to be a foreign-based taxpayer without seeing a lot of instructions about the FEIE). One can use non-US income for an IRA, if it hasn’t been excluded.

[typical.investor]

Thanks for the responses so far. Not to get too detailed but I have my investment accounts registered to my U.S. based address and thus, nothing is reported to my host country in terms of my investments (nor will they ever be). I don't pay taxes in my host (residence) country (to be clear I report all my income in the U.S. in my yearly tax returns) as my employer takes care of my local (host country) taxes. My U.S. based employer is aware I am living outside the U.S. and it is no issue for them as it is an online position.

Ok. First hurdle cleared. Your US broker will open a ROTH for you. Check.



In the “what they don’t know, won’t hurt them” sense? I have some long-standing US brokerage accounts (with a US mailing address) and a non-US brokerage account. If I try to open a new account with any of them, they ask me to certify my residency, not just provide a mailing address.

Yeah, yeah that case exists. I was there too. It didn't sound like the OP had that situation though. They would have mentioned it. But yeah, good to mention it.

You can't exclude some foreign income under FEIE and leave some US taxable. You'd have to do the work in the US.

I don’t use the FEIE, but I’ve seen this comment before. Why is that? Why can’t one take the FEIE only with respect to a portion of qualifying income? I’m not at all suggesting you’re wrong, but I’ve never noticed something official about it (like I said, I don’t use the FEIE, but it’s hard to be a foreign-based taxpayer without seeing a lot of instructions about the FEIE). One can use non-US income for an IRA, if it hasn’t been excluded.

Yes, definitely one can use non-US income for an IRA when it hasn't been excluded. And if you take the FEIE, but are over the limit, there is a window you can contribute to a ROTH before you hit the income limit for contributions.

But it's IRS regulation I believe about not being able to partially exclude the FEIE. I mean you can if you are only a foreign resident for part of the year, but other than that how could you do it? You can't just turn it on and off.

Effect of Choosing the Exclusion
Once you choose to exclude your foreign earned income, that choice remains in effect for that year and all later years unless you revoke it.

Revoking the Exclusion
You can revoke your choice for any year. You do this by attaching a statement that you are revoking one or more previously made choices to the return or amended return for the first year that you do not wish to claim the exclusion(s). You must specify which choice(s) you are revoking. You must revoke separately a choice to exclude foreign earned income and a choice to exclude foreign housing amounts.

If you revoked a choice and within 5 years again wish to choose the same exclusion, you must apply for IRS approval. You do this by requesting a ruling from the IRS.

So if you choose it, it's in effect for that year. I believe that means the whole year but even if it didn't it wouldn't help. You aren't able to turn it on and off like you'd need to for only a partial exclusion.

[plats]

I don’t use the FEIE, but I’ve seen this comment before. Why is that? Why can’t one take the FEIE only with respect to a portion of qualifying income? I’m not at all suggesting you’re wrong, but I’ve never noticed something official about it (like I said, I don’t use the FEIE, but it’s hard to be a foreign-based taxpayer without seeing a lot of instructions about the FEIE). One can use non-US income for an IRA, if it hasn’t been excluded.

If you go through Form 2555 you'll find there is no line with "Enter on line X how much of your foreign earned income you'd like to exclude." Wish there was.