Expat income and 401(k)

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labishop
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Expat income and 401(k)

Post by labishop » Thu Feb 08, 2018 3:47 pm

Hello. Situation: An expat is working abroad for a us-based company that offers a 401K plan. Is any income above the FEIC exclusion of $105,000 eligible for tax deferred 401k contribution? Thank you.

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in_reality
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Re: Expat income and 401(k)

Post by in_reality » Thu Feb 08, 2018 7:18 pm

labishop wrote:
Thu Feb 08, 2018 3:47 pm
Hello. Situation: An expat is working abroad for a us-based company that offers a 401K plan. Is any income above the FEIC exclusion of $105,000 eligible for tax deferred 401k contribution? Thank you.

As for as I know, any un-excluded income would eligible, but haven't done so myself and hope someone will confirm this.

I do know that income above the FEIE limit is eligible for IRA contribution.

In your case, your excluded income (under the FEIE) will be counted in determining IRA contribution eligibility for people covered by a 401k (it's counted for ROTH eligibility too). So for example, single taxpayers wouldn't be eligible as phase out starts at $63k and goes to $73k.

Also, if you are paying your own housing costs, that can be excluded too on 2555 and get you over $105,000 of excluded income.

nicad2000
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Re: Expat income and 401(k)

Post by nicad2000 » Thu Feb 08, 2018 8:35 pm

labishop wrote:
Thu Feb 08, 2018 3:47 pm
Hello. Situation: An expat is working abroad for a us-based company that offers a 401K plan. Is any income above the FEIC exclusion of $105,000 eligible for tax deferred 401k contribution? Thank you.
Yes, my recent experience was that all of my salary income was “eligible” for 401k contributions. You don’t apply the FEIC until your gross income is reduced for whatever 401k contributions you make.

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Dale_G
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Re: Expat income and 401(k)

Post by Dale_G » Thu Feb 08, 2018 11:02 pm

nicad2000 wrote:
Thu Feb 08, 2018 8:35 pm
labishop wrote:
Thu Feb 08, 2018 3:47 pm
Hello. Situation: An expat is working abroad for a us-based company that offers a 401K plan. Is any income above the FEIC exclusion of $105,000 eligible for tax deferred 401k contribution? Thank you.
Yes, my recent experience was that all of my salary income was “eligible” for 401k contributions. You don’t apply the FEIC until your gross income is reduced for whatever 401k contributions you make.
Ooooh! this might be a revelation for me. Is it the case that US citizen earning say 50K (all in foreign wage income) can contribute 5.5K to a Traditional or Roth IRA by simply excluding only 44.5K of foreign income?

Pardon the clumsy wording. Is there any place at the IRS or other reliable sites that I can verify this?

At 80 YO, I still learn stuff at the Bogleheads. One son works in the Indian Ocean - I have the joy of doing his taxes.

Thanks,

Dale
Volatility is my friend

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in_reality
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Re: Expat income and 401(k)

Post by in_reality » Thu Feb 08, 2018 11:46 pm

Dale_G wrote:
Thu Feb 08, 2018 11:02 pm
nicad2000 wrote:
Thu Feb 08, 2018 8:35 pm
labishop wrote:
Thu Feb 08, 2018 3:47 pm
Hello. Situation: An expat is working abroad for a us-based company that offers a 401K plan. Is any income above the FEIC exclusion of $105,000 eligible for tax deferred 401k contribution? Thank you.
Yes, my recent experience was that all of my salary income was “eligible” for 401k contributions. You don’t apply the FEIC until your gross income is reduced for whatever 401k contributions you make.
Ooooh! this might be a revelation for me. Is it the case that US citizen earning say 50K (all in foreign wage income) can contribute 5.5K to a Traditional or Roth IRA by simply excluding only 44.5K of foreign income?
No. That is surely wrong in the case of an IRA.

Only earnings that exceed the FEIE limit can be contributed to an IRA unless you don't use the FEIE at all.

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Dale_G
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Location: Central Florida - on the grown up side of 81

Re: Expat income and 401(k)

Post by Dale_G » Thu Feb 08, 2018 11:55 pm

But it is the case for 401k contributions?
Volatility is my friend

CFM300
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Re: Expat income and 401(k)

Post by CFM300 » Fri Feb 09, 2018 12:05 am

Electing the Foreign-Earned Income Exclusion is an all-or-nothing thing. You can't choose to apply it to just part of your foreign-earned income.

That said, the OP's 401(k) situation might be usual. Some U.S.-based foreign companies allow their employees to make ROTH 401(k) contributions. Since the contributions are done through payroll, they get in -- even though the employees subsequently elect the FEIE on their tax returns. So they pay no tax, but get to make ROTH 401(k) contributions. It's a sweet deal.

CFM300
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Re: Expat income and 401(k)

Post by CFM300 » Fri Feb 09, 2018 12:10 am

labishop wrote:
Thu Feb 08, 2018 3:47 pm
Is any income above the FEIC exclusion of $105,000 eligible for tax deferred 401k contribution?
Sure. And it would be to your advantage to make such contributions, since earnings above those excluded by FEIE are taxed at the marginal rate that includes your excluded income. That's called "stacking."

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in_reality
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Re: Expat income and 401(k)

Post by in_reality » Fri Feb 09, 2018 12:11 am

nicad2000 wrote:
Thu Feb 08, 2018 8:35 pm
labishop wrote:
Thu Feb 08, 2018 3:47 pm
Hello. Situation: An expat is working abroad for a us-based company that offers a 401K plan. Is any income above the FEIC exclusion of $105,000 eligible for tax deferred 401k contribution? Thank you.
Yes, my recent experience was that all of my salary income was “eligible” for 401k contributions. You don’t apply the FEIC until your gross income is reduced for whatever 401k contributions you make.
I question if this is really the case.
The use of a 401(k) for retirement planning also relies on ‘earned income’ to determine contribution limits and eligibility

A 401(k) can include employer contribution amounts depending on a variety of factors, as well as much higher contribution limits, and there may be ways for an employer of an expat worker to continue 401(k) contributions while the employee is on foreign assignment. Some employees are able to make 401(k) contributions whilst on an overseas assignment by working under a shadow, split or dual payroll.
http://shieldgeo.com/contributing-to-a- ... ssignment/

In fact, it seems there are differing opinions on the matter.
An IRS specialist had expressed the opinion that under Revenue Ruling 70-491, FEIE income may not be contributed to retirement plans formed under Internal Revenue Code 401
https://moneymattersforglobetrotters.co ... e-to-401k/

I agree if it's done via payroll, that's different that if it's income to you. I don't how one could deduct it from gross income and then apply the FEIE. That would appear to violate form 2555 instructions to enter all foreign earned income.

Expro
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Re: Expat income and 401(k)

Post by Expro » Fri Feb 09, 2018 2:30 am

Is the OP's income being "equalized" by the US employer? Are they paid in US dollars into a US bank account?
Has "Hypo" tax been mentioned when discussing your new role with HR?

ivk5
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Re: Expat income and 401(k)

Post by ivk5 » Fri Feb 09, 2018 3:59 am

Expro wrote:
Fri Feb 09, 2018 2:30 am
Is the OP's income being "equalized" by the US employer? Are they paid in US dollars into a US bank account?
Has "Hypo" tax been mentioned when discussing your new role with HR?
This is an important point. If the employee is paying taxes in a foreign country, that country may not recognize a 401(k) contribution as a deduction against income, causing it to be effectively taxed twice (abroad on the way in, and by the US on the way out).

This is not an issue if it is a Roth 401(k), or if it can be converted in-plan without triggering tax (eg amounts not exceeding standard deduction).

But as noted upthread, there are at least some US employers that will allow an expat employee to make elective deferrals via payroll to 401ks, which effectively allows contributing on the basis of ALL the income, even if some or all of the taxpayer's reported income is later excluded on their return via FEIE.

Jill07
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Re: Expat income and 401(k)

Post by Jill07 » Tue Sep 11, 2018 3:39 pm

Does anyone have further clarification on whether an expat whose entire income is excluded under FEIE can contribute to their company’s 401k or Roth 401k?
I am not considering any IRAs. I understand that contributions to any IRA are not permitted.

Does it make a difference if the 401k is a “Safe Harbor” 401k? The company is contributing 3% of employee salary even if they do not make their own contributions.

I found conflicting opinions here:
http://fairmark.com/forum/read.php?2,81775

and here (see comments section of this article):
https://moneymattersforglobetrotters.co ... e-to-401k/

Thank you,
Jill

ivk5
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Re: Expat income and 401(k)

Post by ivk5 » Wed Sep 12, 2018 1:36 am

No first-hand experience with this exact scenario but my understanding is contributions to employer plans should be fine. That contribution comes off the top of your income (reduces W2 income). FEIE is claimed later on your tax return based on your actual reported income ie net of contributions.

As noted upthread, whether or not it actually reduces your global tax liability, and thus whether or not it is a good idea for tax planning purposes, is another story and will depend on the tax treatment by your foreign country of residence and other individual considerations.

Jill07
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Joined: Sat Mar 24, 2007 6:19 am

Re: Expat income and 401(k)

Post by Jill07 » Wed Sep 12, 2018 12:24 pm

ivk5 wrote:
Wed Sep 12, 2018 1:36 am
No first-hand experience with this exact scenario but my understanding is contributions to employer plans should be fine. That contribution comes off the top of your income (reduces W2 income). FEIE is claimed later on your tax return based on your actual reported income ie net of contributions.
This does make sense. The overseas job was originally a short-term assignment (not FEIE eligible) & is now being extended. Some contributions to the 401k have already been made for 2018. There was some concern that those contributions would not be allowed if FEIE was now claimed for 2018. It sounds like those contributions are okay but probably does not make sense to continue them.

The company does offer a ROTH 401k option, but it seems like a loophole to contribute to the ROTH 401k with income that is 100% excluded via FEIE. Holding off on that option for now, until sure it is permitted.

While doing all this research, I did learn that the FEIE presents a good opportunity to do some Roth conversions with 401k from previous employer.

Thank you for taking the time to respond.
Jill

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