FEIE - Minimum Earned Income for Roth IRA?

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FEIE - Minimum Earned Income for Roth IRA?

Postby canga » Wed Dec 26, 2012 11:09 pm

I live overseas and utilize the foreign earned income exclusion (FEIE). I came into some unexpected earned income for 2012 and as a result I am trying to determine if I have enough earned income to contribute to a Roth IRA.

IRS Numbers from 2012:
Foreign Earned Income Exclusion (FEIE): $95,100
Foreign Housing Exclusion: $15,216 (or actual housing cost, whichever is less)
Personal Exemption: $3,800
Standard Deduction: $5,950 (Single)
401k contributions: $17,000

Questions:
1. Do all of the above reduce earned income? This would mean a minimum earned income of $137,066 is required, which is beyond the MAGI for Roth IRA contributions. Or just FEIE and Foreign Housing Exclusion ($110,316)? Or is it some other combination of the above? All of the above appear to exclude income for tax purposes.
2. Which is first applied to the standard deduction and personal exemption: earned or unearned income? For example, can I use dividends and capital gains to use up the personal exemption and standard deduction?

Appreciate your help, thanks.
canga
 
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Re: FEIE - Minimum Earned Income for Roth IRA?

Postby bpp » Thu Dec 27, 2012 12:19 am

The FEIE reduces earned income.
I have never used the Foreign Housing Exclusion, so not sure, but believe it works like the FEIE.
The Personal Exemption and Standard Deduction do NOT reduce earned income as far as Roth contributions are concerned.
I have never had a 401k, so don't know how those work.

Excluding the two bits I am unfamiliar with, here is a simple case assuming just the FEIE and the Personal Exemption and Standard Deduction:
Earned income: $99,000
Other income (interest, etc.): $10,000
Total income: $109,000
FEIE: $95,100
Earned income minus FEIE: $3,900
Total income minus FEIE: $13,900

In this case, your total income of $109,000 is below the $110,000 phase-out starting level for a Roth contribution (single filer), and you can contribute up to $3,900 (earned income minus FEIE) to a Roth.

Of the $13,900 in taxable income, $9750 falls within your Personal Exemption and Standard Deduction, leaving $4150 that will actually be taxed. Note, however, that this $4150 will be taxed at the marginal rate that would apply without the FEIE.

I think I have that right -- corrections welcome.
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Re: FEIE - Minimum Earned Income for Roth IRA?

Postby canga » Thu Dec 27, 2012 2:05 am

bpp wrote:The FEIE reduces earned income.
I have never used the Foreign Housing Exclusion, so not sure, but believe it works like the FEIE.
The Personal Exemption and Standard Deduction do NOT reduce earned income as far as Roth contributions are concerned.
I have never had a 401k, so don't know how those work.

Excluding the two bits I am unfamiliar with, here is a simple case assuming just the FEIE and the Personal Exemption and Standard Deduction:
Earned income: $99,000
Other income (interest, etc.): $10,000
Total income: $109,000
FEIE: $95,100
Earned income minus FEIE: $3,900
Total income minus FEIE: $13,900

In this case, your total income of $109,000 is below the $110,000 phase-out starting level for a Roth contribution (single filer), and you can contribute up to $3,900 (earned income minus FEIE) to a Roth.

Of the $13,900 in taxable income, $9750 falls within your Personal Exemption and Standard Deduction, leaving $4150 that will actually be taxed. Note, however, that this $4150 will be taxed at the marginal rate that would apply without the FEIE.

I think I have that right -- corrections welcome.


Thanks, this is very helpful and does make sense.

Can anyone help determine if 401k and Foreign Housing Exclusion reduce earned income for the purposes of determining Roth IRA contributions? I would also guess that FEIE and FHE work the same, and I would assume 401k does not exclude income, but I've not been able to confirm.
canga
 
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Re: FEIE - Minimum Earned Income for Roth IRA?

Postby sscritic » Thu Dec 27, 2012 2:19 am

I think what you have right is that taxable income is irrelevant. Forgetting anything about foreign income, if someone earns $4000 (in taxable compensation*) in the US they can contribute $4000 to an IRA even if their standard deduction is greater than $4000 and their taxable income is zero.

As you note (and so sayeth the IRS):
Compensation does not include any of the following items.
...
Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs.


There is not a separate Roth limit in the sense that you can contribute $5000 total to either one or the other or both, e.g., $3000 traditional and $2000 Roth.
Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA.
[And later]
If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs generally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all contributions for the year to all IRAs other than Roth IRAs. Employer contributions under a SEP or SIMPLE IRA plan do not affect this limit.

This means that your contribution limit is the lesser of:
$5,000 ($6,000 if you are age 50 or older) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or

Your taxable compensation minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs.


However, for determining your MAGI for reducing your Roth contribution limits:
Add the following deductions and exclusions:

Traditional IRA deduction,
...
Foreign earned income exclusion,

Foreign housing exclusion or deduction,

For traditional
If you file Form 1040, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts.
IRA deduction.
...
Foreign earned income exclusion.

Foreign housing exclusion or deduction.
...
This is your modified AGI.

See pub 590 for information on IRAs. 401(k) contributions don't show up on your 1040.
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Re: FEIE - Minimum Earned Income for Roth IRA?

Postby Alan S. » Thu Dec 27, 2012 1:54 pm

canga wrote:I live overseas and utilize the foreign earned income exclusion (FEIE). I came into some unexpected earned income for 2012 and as a result I am trying to determine if I have enough earned income to contribute to a Roth IRA.

IRS Numbers from 2012:
Foreign Earned Income Exclusion (FEIE): $95,100
Foreign Housing Exclusion: $15,216 (or actual housing cost, whichever is less)
Personal Exemption: $3,800
Standard Deduction: $5,950 (Single)
401k contributions: $17,000

Questions:
1. Do all of the above reduce earned income? This would mean a minimum earned income of $137,066 is required, which is beyond the MAGI for Roth IRA contributions. Or just FEIE and Foreign Housing Exclusion ($110,316)? Or is it some other combination of the above? All of the above appear to exclude income for tax purposes.
2. Which is first applied to the standard deduction and personal exemption: earned or unearned income? For example, can I use dividends and capital gains to use up the personal exemption and standard deduction?

Appreciate your help, thanks.


You did not indicate your gross earned income before deductions including the 401k deduction. There are two tests to pass to determine if you can contribute to a Roth IRA:

1) MAGI test. MAGI cannot exceed 110k (single filer) or phaseout begins. At 125k, phaseout is complete. MAGI does not include your 401k deferrals. FEIE and FHE (plus some other things) must be added back to your AGI to determine your MAGI for Roth contribution purposes. You cannot elect to partially exclude FEIE or partially exclude FHE, but you CAN elect to exclude one of those and not the other.

2) Taxable compensation test (earned income) - You must also have taxable compensation to fund a Roth contribution after subtracting the FEIE or FHE. If you elect the FEIE for example and your taxable compensation is less than 95,100, you will have no taxable compensation on which to base a Roth contribution, even if your MAGI falls under the max.

Perhaps passing on the FHE and electing the FEIE would assist in meeting both requirements above, but making a Roth contribution is not beneficial if your election decisions increase your income taxes by more than ~25% of your allowed Roth contribution.
Alan S.
 
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