Retirement Contributions & Expats
Is that true that expats cannot contribute to ROTH IRAs?
No, this is not true.
In order to qualify for a ROTH IRA, a taxpayer must have earned income. Because of this rule, if all of your income is excluded through the Foreign Earned Income Exclusion, you cannot make contributions to a ROTH IRA. You may not choose to exclude only part of your foreign earned income in order to contribute to a ROTH IRA. The rule is - exclude it all or nothing.
However, you may choose to claim the shorter 12-months period abroad, which will naturally reduce the amount of the exclusion thus leaving a part of your earned income qualifying for ROTH.
By having a part of your income exempt from the exclusion this way, you would remain below the tax threshold (bearing in mind the personal exemption and standard deduction) and would also be eligible to contribute to a ROTH IRA as long as the amount contributed does not exceed the amount of income reported ($5,500). You can have your cake and eat it too.
You may also participate in an employer-sponsored 401-K plan. The Foreign Earned Income Exclusion applied to your wages will be reduced in proportion to the number of contributions made to the plan.
How much can I contribute to my IRA for this calendar year? Do I need to make my contributions before the year-end?
Contributions to Traditional or ROTH IRAs can be made until April 15, 2018 (for the 2017 tax year).
We recommend that you file your tax return early next year so that we can calculate how much you can put towards your IRA when we’re preparing your return. That way, you can be sure you won’t ever need to amend your return.
This year I paid a penalty for excess ROTH contributions. What can I do now to prevent paying a penalty next year? Will I be able to contribute to my ROTH IRA again?
A 6% penalty for excess ROTH contributions was applied because we excluded your foreign earned income. Income tax rate on the non-excluded earnings would be much higher (15% to 28% depending on your gross income).
To avoid paying a penalty next year, you’ll need to do two things:
- You’ll need to withdraw your excess contributions by the end of the year. If your excess contributions were made for 2017, you must withdraw them before the due date of your federal tax return for 2017 including extensions (October 15 of 2018 if an extension was filed). You must withdraw the entire amount of excess contributions and any accumulated earnings from that amount. If you don't do so, you will continue to pay a penalty on your excess contributions every year and the option to withdraw your excess contributions will no longer be available.
- Please contact us early next year. We will prepare a draft of your tax return and tell you the exact amount of contributions that you are allowed to make over the rest of the year. Do not make any contributions now. You have until April 15 of next year to make contributions for this year.