Tax-Advantaged Investing for a freelancer [US ex-pat in the UK]

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
atheB9aishei
Posts: 2
Joined: Tue Mar 14, 2023 4:52 pm

Tax-Advantaged Investing for a freelancer [US ex-pat in the UK]

Post by atheB9aishei »

Hello,

I am looking for some help regarding retirement savings options for US freelancers who live abroad and filing tax return separately from partner.

I am a US citizen living in the UK. I am married to a European citizen who doesn't hold US residency. I was looking at Roth IRA for my savings option but recently learned that as a person filing tax separately and who makes MAGI more than 10k, my contribution limit is 0. So now I'm back to the beginning looking for an account type which I can contribute to. However, unless I'm mistaken, none of the tax-advantaged accounts are for me?

- 401(k): I am not employed by a company
- Roth IRA: I am married, filing separately, earned more than $10,000, this[1] table says it's zero
- SEP: I do not have an employer -- would this one work? I think I would have to set up a self-employment, which would massively complicate tax filing according to my accountant
- traditional IRA: I think this can work, but the limit is only $6,000

I would greatly appreciate any tips or advice! :happy

Best wishes

[1]: https://www.irs.gov/retirement-plans/am ... e-for-2023
tubaleiter
Posts: 247
Joined: Tue Mar 09, 2021 11:58 am

Re: Tax-Advantaged Investing for a freelancer [US ex-pat in the UK]

Post by tubaleiter »

For some background investing as a US citizen living in the UK: https://www.bogleheads.org/wiki/Investi ... _residents - recommend reading this first so all the terms and acronyms below make some sense!

I think the big one you're missing is a UK SIPP (self-invested personal pension). Assuming you can satisfy yourself with respect to the whole "foreign grantor trust" question, and thus forms 3520/3520A and potentially PFIC considerations, a SIPP would be an ideal vehicle for long-term tax-advantaged investing (sorry for throwing all the acronyms and obscure terms out there - SIPPs have a bit of grey around them where there's no clear consensus. Talk to your accountant, assuming they're dual US/UK qualified). £40k annual limit (with rumours that the Budget being announced today will increase that), tax-deferred until withdrawal by both the US and UK, generally quite similar to a 401k, except you don't need an employer.

When you say "set up a self-employment", you're already a freelancer and thus self-employed? But in relation to a SEP, what I think you/your accountant is saying is that you'd have to set up a company and you'd be the only employee? In which case yes, I agree that adds a lot of complication, especially when you talk about US citizens owning UK companies.

Traditional IRAs also get into some questions - would you be looking to deduct the contributions from your UK income tax? If so, a close reading of the treaty implies that the IRA would have needed to be set up prior to leaving the US. If you don't deduct from your UK taxes, you're paying after-tax money in there, but will still get taxed on the growth at withdrawal - need to keep good records. Not worth the effort for a $6k limit, to me. But one key advantage could be the ability to get around the catch-22 of PFIC and KID/KIID, since you can just buy PFICs inside the IRA.

The other semi-advantaged option is an ISA (UK tax advantaged, but US taxable). Today, it's a pain because of that PFIC + KID/KIID catch-22. But hopefully soon (fingers crossed!) the UK will repeal the KID/KIID requirement, in which case you could easily invest in US ETFs. £20k annual limit, UK tax free on capital gains, dividends and interest (basically the same as a Roth IRA, but without the age limit on withdrawals - withdraw any time). Does have to be reported as a taxable brokerage account on US taxes.

Bit of a conundrum on the ISA since the UK tax year ends on 05Apr, and I don't know if we'll hear about the repeal of KID/KIID before that (I'm hoping it's in the Budget today, but that's just a hope). You could fund an ISA in the next few weeks with £20k, and then do another £20k after 06Apr. If/when KID/KIID gets repealed, you invest in appropriate US ETFs. If not, you could either do individual stocks, or just leave in cash while you wait (although the interest rates may not be great - probably better at Interactive Brokers than Hargreaves Lansdown, the two main options for US citizens).

I know that's a lot to throw out there, happy to help with any questions to the best of my ability (I'm not a professional, just a self-taught amateur, but in a similar situation - I'm a US citizen employed in the UK with a self-employed EU wife, albeit with an un-surrendered green card, so she's in the US tax system too).
User avatar
typical.investor
Posts: 5263
Joined: Mon Jun 11, 2018 3:17 am

Re: Tax-Advantaged Investing for a freelancer [US ex-pat in the UK]

Post by typical.investor »

Welcome,
atheB9aishei wrote: Tue Mar 14, 2023 5:18 pm Hello,

I am looking for some help regarding retirement savings options for US freelancers
Where are you doing the work? If you are doing the work overseas, doesn't that make it foreign income? I don't think it matters if you are working for a US clients or not. That's my understanding at least.

If you exclude your income under the FEIE, you wouldn't have US earned income to make an IRA contribution with unless you are over the FEIE exclusion limit (what $108,700 now).

If you don't exclude under the FEIE but rather take a tax credit against foreign taxes, then you'd be eligible for an IRA contribution. I know in the UK that can make sense for larger incomes, but those with a lower income say FEIE saves them money.

The penalties for over contribution are pretty steep - what 6% of the excess amount per year until removed and 10% penalty on the gains or something along those lines.

So I'd be careful to be sure you have US earned income before making a contribution.
tubaleiter
Posts: 247
Joined: Tue Mar 09, 2021 11:58 am

Re: Tax-Advantaged Investing for a freelancer [US ex-pat in the UK]

Post by tubaleiter »

typical.investor wrote: Wed Mar 15, 2023 6:34 am If you don't exclude under the FEIE but rather take a tax credit against foreign taxes, then you'd be eligible for an IRA contribution. I know in the UK that can make sense for larger incomes, but those with a lower income say FEIE saves them money.

The penalties for over contribution are pretty steep - what 6% of the excess amount per year until removed and 10% penalty on the gains or something along those lines.

So I'd be careful to be sure you have US earned income before making a contribution.
There's one more hurdle that atheB9aishei falls afoul of: the US penalises people who choose the Married Filing Separately filing status. Since atheB9aishei is married, they only have the choice of Married Filing Jointly (MFJ) or Married Filing Separately (MFS) - can't do Single or Head of Household.

Unfortunately, both options have downsides:
  • MFJ brings atheB9aishei's spouse into the US tax system. Consequences can range from advantageous (higher standard deduction, additional stimulus checks, etc.) to fairly disastrous (if the spouse owns PFICs, for example)
  • MFS is practically not eligible for Roth IRA contributions if the filer has almost any income (technically, MAGI - which means FEIE doesn't get excluded from the calculation). If atheB9aishei makes more than $0, Roth IRA contributions are limited, until they're completely banned above $10k. MFS also limits a number of other credits
So unless atheB9aishei is willing to bring their spouse into the US tax system, with all that entails, they're effectively barred from a Roth IRA.
Topic Author
atheB9aishei
Posts: 2
Joined: Tue Mar 14, 2023 4:52 pm

Re: Tax-Advantaged Investing for a freelancer [US ex-pat in the UK]

Post by atheB9aishei »

Thank you both for such helpful and detailed responses!
tubaleiter wrote: Wed Mar 15, 2023 1:37 am I think the big one you're missing is a UK SIPP (self-invested personal pension).
That's a great suggestion! I have not considered it because I assumed that it is not allowed for me (since both Vanguard Investor and Fidelity International state that they do not open SIPPs for US persons). Do you have a provider you can recommend? Perhaps Interactive Brokers?
tubaleiter wrote: Wed Mar 15, 2023 1:37 am I know that's a lot to throw out there, happy to help with any questions to the best of my ability (I'm not a professional, just a self-taught amateur, but in a similar situation - I'm a US citizen employed in the UK with a self-employed EU wife, albeit with an un-surrendered green card, so she's in the US tax system too).
Thank you again. Yes, it's a lot to deal with. We do not want to bring my spouse into the US tax system, and the $6k IRA limit is probably not worth it anyway...
tubaleiter
Posts: 247
Joined: Tue Mar 09, 2021 11:58 am

Re: Tax-Advantaged Investing for a freelancer [US ex-pat in the UK]

Post by tubaleiter »

tubaleiter wrote: Wed Mar 15, 2023 1:37 am I think the big one you're missing is a UK SIPP (self-invested personal pension).
That's a great suggestion! I have not considered it because I assumed that it is not allowed for me (since both Vanguard Investor and Fidelity International state that they do not open SIPPs for US persons). Do you have a provider you can recommend? Perhaps Interactive Brokers?
Interactive Brokers only does SIPPs via a separate administrator - I haven't really investigated, I assume there would be fees on top: https://www.interactivebrokers.co.uk/en ... hp?f=39434

Hargreaves Lansdown will happily do a SIPP for US persons (and they'll also do ISA, LISA, and brokerage account). A.J. Bell will also do SIPPs (and only SIPPs, for US persons). For both of them, the trading fees are relatively high, but if you adopt a very passive, buy-and-hold approach, and use their "regular investing" (monthly standing deposits) to add money, you can keep them to a minimum. That's good Bogleheads practice, anyway!

Only catch on the SIPPs is satisfying yourself with respect to the "foreign grantor trust" question - if you are satisfied you're ok not filing 3520/3520A, or you decide you should file them and you're ok doing that, then a SIPP is a strong option.
Last edited by tubaleiter on Sun Mar 19, 2023 1:47 am, edited 1 time in total.
halfnine
Posts: 2421
Joined: Tue Dec 21, 2010 12:48 pm

Re: Tax-Advantaged Investing for a freelancer [US ex-pat in the UK]

Post by halfnine »

atheB9aishei wrote: Tue Mar 14, 2023 5:18 pm ...- SEP: I do not have an employer -- would this one work? I think I would have to set up a self-employment, which would massively complicate tax filing according to my accountant...
It doesn't complicate tax filing at all. You are already set up for self-employment the second you became a freelancer. I am sure (at least when you were in the USA) that you were being taxed as a sole proprietor via Schedule C and paying appropriate SE taxes. Adding a SEP contribution to the mix isn't a big deal (from a tax standpoint)

The bigger issue is that income typically is taxed (first) where the work is physically performed. So your income is likely UK taxable in which case you needed to have setup as some sort of sole proprietorship within the UK. If this is the case then UK taxes are going to dominate your concerns and contributing to any sort of US retirement plan is proabably not going to be deductible off UK taxes.

The other issue is USA SE taxes versus the UK NI taxes. You are likely (and would probably prefer) required to pay NI taxes instead of SE taxes on your income.
Post Reply