Working Abroad and IRA

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Working Abroad and IRA

Postby maidius » Thu Mar 14, 2013 10:26 pm

Dear Bogleheads,

This is my first post, but I'm currently in the process of switching some old investments from multiple accounts into Vanguard to better manage my money. I will ask later regarding my financing questions later. I currently have a tax question related to IRAs.

I'm working outside of the US and due to my salary I don't have to pay any tax inside the US (If you make under ~90,000, then your exempt). My question is this: I have a Traditional IRA and a Roth IRA. Because I don't pay taxes right now, would it be better to be placing my money in the Traditional or the Roth?

Since Roth accounts, you pay the tax when you fund your account, would it be better to be funding my Roth at this time? I'm wondering what my 'tax bracket' would be since I'm not paying any taxes. I hope my question and description of my thoughts is clear.
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Re: Working Abroad and IRA

Postby bpp » Thu Mar 14, 2013 11:07 pm

maidius wrote:I'm working outside of the US and due to my salary I don't have to pay any tax inside the US (If you make under ~90,000, then your exempt). My question is this: I have a Traditional IRA and a Roth IRA. Because I don't pay taxes right now, would it be better to be placing my money in the Traditional or the Roth?


You cannot contribute excluded income to an IRA. You'll need some un-excluded earned income to do that. Do you have any?
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Re: Working Abroad and IRA

Postby Alan S. » Thu Mar 14, 2013 11:37 pm

Your foreign earned income exclusion is all or nothing and so is your foreign housing exclusion, if any. But you must have earned income that is NOT excluded to make any IRA contribution. If you do have such income, you are probably in a low marginal bracket, so a Roth IRA would be the way to go. If you cannot make a regular contribution, this may be a good time to convert to a Roth IRA since your conversion tax might be low while you are eligible for the foreign earned income or housing exclusions.
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Re: Working Abroad and IRA

Postby maidius » Fri Mar 15, 2013 7:16 pm

bpp wrote:
maidius wrote:I'm working outside of the US and due to my salary I don't have to pay any tax inside the US (If you make under ~90,000, then your exempt). My question is this: I have a Traditional IRA and a Roth IRA. Because I don't pay taxes right now, would it be better to be placing my money in the Traditional or the Roth?


You cannot contribute excluded income to an IRA. You'll need some un-excluded earned income to do that. Do you have any?


I do have funds in a US account that I have earned through previous employment, and currently a small amount is removed each month (but I want to increase it), so this shouldn't be a problem.

If I understand you correctly, you're saying that I wouldn't be able to use the money I made abroad to fund an IRA unless I brought it in as un-excluded funds (which means I have to pay tax on it.)
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Re: Working Abroad and IRA

Postby maidius » Fri Mar 15, 2013 7:18 pm

Alan S. wrote:Your foreign earned income exclusion is all or nothing and so is your foreign housing exclusion, if any. But you must have earned income that is NOT excluded to make any IRA contribution. If you do have such income, you are probably in a low marginal bracket, so a Roth IRA would be the way to go. If you cannot make a regular contribution, this may be a good time to convert to a Roth IRA since your conversion tax might be low while you are eligible for the foreign earned income or housing exclusions.


Thanks this is great information. I already have a Roth IRA from a company (I'm switching to Vanguard and I will be choosing the Vanguard 2050 Retirement Fund), and I also have a 401k from a previous job that I'll be bringing it over to Vanguard, but I'm not sure what fund I should use or if I should even use the same fund. I think I should post in the invest forum to get some advice. I'm just trying to get my money to work for me at the moment instead of it not growing at all (which it isn't in its current set of accounts).
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Re: Working Abroad and IRA

Postby bpp » Fri Mar 15, 2013 8:46 pm

maidius wrote:
bpp wrote:
maidius wrote:I'm working outside of the US and due to my salary I don't have to pay any tax inside the US (If you make under ~90,000, then your exempt). My question is this: I have a Traditional IRA and a Roth IRA. Because I don't pay taxes right now, would it be better to be placing my money in the Traditional or the Roth?


You cannot contribute excluded income to an IRA. You'll need some un-excluded earned income to do that. Do you have any?


I do have funds in a US account that I have earned through previous employment, and currently a small amount is removed each month (but I want to increase it), so this shouldn't be a problem.

If I understand you correctly, you're saying that I wouldn't be able to use the money I made abroad to fund an IRA unless I brought it in as un-excluded funds (which means I have to pay tax on it.)


What I mean is that you are not allowed to contribute to an IRA in one year more than you made in taxable earned income that year. Excluded income does not count as taxable earned income, so unless you have some un-excluded earned income (wages, salary, etc. -- not interest or investment income), then you cannot contribute to an IRA at all.

(See Pub. 590 for details on IRA contribution limits.)
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Re: Working Abroad and IRA

Postby BrandonBogle » Sat Mar 16, 2013 12:20 am

Regardless of if you have any non-foreign excluded earned income in 2013, you should consider converting some Traditional -> Roth while you have an effective 0% tax rate.
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Re: Working Abroad and IRA

Postby maidius » Sat Mar 16, 2013 4:57 am

BrandonBogle wrote:Regardless of if you have any non-foreign excluded earned income in 2013, you should consider converting some Traditional -> Roth while you have an effective 0% tax rate.


Would this be a worthwhile idea? Would it even work that way? Due to my excluded funds, would I be classified as having a 0% tax rate? Thereby allowing me to transfer my Non-taxed 401k funds into a Roth at a low rate...
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Re: Working Abroad and IRA

Postby maidius » Sat Mar 16, 2013 5:01 am

What I mean is that you are not allowed to contribute to an IRA in one year more than you made in taxable earned income that year. Excluded income does not count as taxable earned income, so unless you have some un-excluded earned income (wages, salary, etc. -- not interest or investment income), then you cannot contribute to an IRA at all.

(See Pub. 590 for details on IRA contribution limits.)


I see what you mean, by the statement here "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."

Is there a way to bring in "taxable" income so I can contribute to my IRA? It seems like I can only contribute money that I have made within the year for my IRA, but wouldn't be allowed to use funds previously made in previous years, did I understand this correctly?
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Re: Working Abroad and IRA

Postby FoolishJumper » Sat Mar 16, 2013 5:19 am

I'm browsing from bed, so normally I wouldn't respond, but you've just gotten completely include incorrect indirmation.

Thanks to the 'The Tax Reconciliation Act of 2005', the foreign earned income exclusion doesn't eliminate the top income levels, it eliminates the bottom. So if you made $80k outside the US, which would put you in the 25% marginal tax bracket, then any additional income you make (which isn't covered by the FEIE) starts at the 25% tax level, not as if it was your first dollar of taxable income.

The below article is very good and my advice. If you can take the FTC and cover the same tax obligation to the IRS, then it almost always makes sense to do so!

http://americansabroad.org/issues/taxation/article-on-foreign-tax-credit-revised/

And yes, your can only use 2012 salary to open a 2012 IRA, etc. Money sitting in a pool in the states (which was earned previously in the stay s) still doesn't give earned income for 2012. The foreign tax credit is your only option. In that case, then definitely open a Roth IRA , as your marginal tax rate would be 0%. This is my scenario, although I may go to some FTC and the full FEIE as I just moved to a lower tax rate country.
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Re: Working Abroad and IRA

Postby bpp » Sat Mar 16, 2013 6:37 am

maidius wrote:
What I mean is that you are not allowed to contribute to an IRA in one year more than you made in taxable earned income that year. Excluded income does not count as taxable earned income, so unless you have some un-excluded earned income (wages, salary, etc. -- not interest or investment income), then you cannot contribute to an IRA at all.

(See Pub. 590 for details on IRA contribution limits.)


I see what you mean, by the statement here "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."

Is there a way to bring in "taxable" income so I can contribute to my IRA?


If using the FEIE results in excluding all of your earned income, then your only option is to not use the FEIE. In that case, you can use the Foreign Tax Credit on that income instead. As FoolishJumper notes, sometimes this could be preferable anyway.

And before you ask, you cannot "partially" use the FEIE to only exclude some of your income below the limit. If you use it, you have to use all of it.

It seems like I can only contribute money that I have made within the year for my IRA, but wouldn't be allowed to use funds previously made in previous years, did I understand this correctly?


As FoolishJumper says, correct. Only current year's income can be used for the current year's IRA contributions.
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Re: Working Abroad and IRA

Postby maidius » Sat Mar 16, 2013 7:44 am

Wow... I started my Roth IRA before I left the US and have had a small amount of money coming out of my bank account every month... I will have to take a second look at how I report my income. This is all a bit new to me and I will have to speak with my accountant regarding this situation. Thank you all for the insights I have a lot of reading to do.
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Re: Working Abroad and IRA

Postby plats » Sat Mar 16, 2013 7:58 am

Using TurboTax, or some other software, you can try various scenarios--Using FEIE, FTC, Housing exclusion, with and without a tIRA or ROTH IRA.
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