Do I need retirement accounts if my deductions are already high?

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K8ya
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Do I need retirement accounts if my deductions are already high?

Post by K8ya » Fri May 24, 2019 8:34 pm

I live outside the US and the FEIE deduction is $102,000, well ahead of the $30,000 I make. Even if my income doubles I'll likely never catch up to the FEIE deduction as it continues to increase each yaer.

I see that the capital gains rate is dependent on the highest taxed dollar, and as my tax bracket is 10% (or really $0) I pay no capital gains tax.

Seems to me that I don't need retirement accounts. Which is a great bonus because i hope to retire early (once my conservative targets are reached).

Am I missing anything? I tend to do my own taxes even though it's not my field. But this matter seems straightforward and advantageous from what I understand.

Dottie57
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Re: Do I need retirement accounts if my deductions are already high?

Post by Dottie57 » Fri May 24, 2019 8:41 pm

Retirement accounts help with tax advantaged savings. I would think Roth IRA would be advantageous for growth which is not taxed.

What is FEIE deduction?

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grabiner
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Re: Do I need retirement accounts if my deductions are already high?

Post by grabiner » Fri May 24, 2019 8:51 pm

The capital-gains tax rate is dependent on the tax rate for your total income, including the FEIE exclusion. If you are single and take the standard deduction, the rate would become 15% at a total income of $51,675 ($39,475 start of the 22% bracket plus $12,200 standard deduction).

You will also pay taxes on non-qualified dividends at your full tax rate, even in a foreign country (unless that foreign country taxes the dividends at a higher rate so that you can take a tax credit). You will earn non-qualified dividends on your bond holdings, and a small amount on your stock holdings. A Roth IRA will shelter those dividends from US tax.

Will you be earning US Social Security? If so, income which is taxed at 0% could cause more of your Social Security to be taxed; again, a Roth IRA will protect against this.

Finally, there is the possibility that the 0% tax on qualified dividends and long-term gains in your tax bracket will be increased; it used to be 5%. If your investments are in a tax-sheltered account, this will not affect you.

The downside is that you can withdraw only contributions, not earnings, from a Roth IRA tax-free, until you have turned 59-1/2 and held the Roth IRA for five years. After that, the Roth IRA has no downside, as all withdrawals are tax-free.
Wiki David Grabiner

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K8ya
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Re: Do I need retirement accounts if my deductions are already high?

Post by K8ya » Fri May 24, 2019 9:14 pm

Dottie57 wrote:
Fri May 24, 2019 8:41 pm
Retirement accounts help with tax advantaged savings. I would think Roth IRA would be advantageous for growth which is not taxed.

What is FEIE deduction?
Foreign Earned Income Exclusion. For most US expats it deducts their entire income and makes their IRS payment $0

Topic Author
K8ya
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Re: Do I need retirement accounts if my deductions are already high?

Post by K8ya » Fri May 24, 2019 9:19 pm

grabiner wrote:
Fri May 24, 2019 8:51 pm
Finally, there is the possibility that the 0% tax on qualified dividends and long-term gains in your tax bracket will be increased; it used to be 5%. If your investments are in a tax-sheltered account, this will not affect you.

The downside is that you can withdraw only contributions, not earnings, from a Roth IRA tax-free, until you have turned 59-1/2 and held the Roth IRA for five years. After that, the Roth IRA has no downside, as all withdrawals are tax-free.
When were capital gains last taxed at 5% in the lowest bracket?

To me a 5% tax on contributions is worth the flexibility to not have to wait until 59.5 to withdraw earnings without penalty.

Katietsu
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Re: Do I need retirement accounts if my deductions are already high?

Post by Katietsu » Fri May 24, 2019 9:25 pm

Consider a Roth IRA. Contributions can be withdrawn at any time without a tax consequence or penalty. Only earnings need to stay until 59.5 to avoid taxes. If you use a Roth for part of your savings, just keep really good track of your contributions since you might pull money out before 59.5z

Dottie57
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Re: Do I need retirement accounts if my deductions are already high?

Post by Dottie57 » Fri May 24, 2019 9:49 pm

K8ya wrote:
Fri May 24, 2019 9:14 pm
Dottie57 wrote:
Fri May 24, 2019 8:41 pm
Retirement accounts help with tax advantaged savings. I would think Roth IRA would be advantageous for growth which is not taxed.

What is FEIE deduction?
Foreign Earned Income Exclusion. For most US expats it deducts their entire income and makes their IRS payment $0
Thank you.

assyadh
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Re: Do I need retirement accounts if my deductions are already high?

Post by assyadh » Fri May 24, 2019 10:03 pm

If you don't have any earned income not sheltered by the FEIE then you cannot contribute to an IRA.

Consider the foreign tax credit (if you would still get a 0$ bill), it would allow you to contribute

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leeks
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Re: Do I need retirement accounts if my deductions are already high?

Post by leeks » Fri May 24, 2019 10:19 pm

1. Will you always live outside the US? You can't really know that I assume. Things can change and family needs, for example, could adjust your plans. If it were me, I would want some kind of retirement strategy that can work wherever you live - including if you move to the US later in life. So I would probably seek a way to ensure social security eligibility, for example.

2. Aside from tax benefits, some people find a behavioral benefit to having money that feels more or less "untouchable" until retirement. That feeling can help them maintain a long-term investment strategy and not be tempted to take out part of their "retirement" money early for other pursuits. Having separate accounts for emergency funds vs short-term savings (vacations, home downpayment, children's college fund) vs retirement savings makes sense to me based on how I feel about and use money. But not everyone feels this way of course.

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Re: Do I need retirement accounts if my deductions are already high?

Post by Spirit Rider » Fri May 24, 2019 11:20 pm

Katietsu wrote:
Fri May 24, 2019 9:25 pm
Consider a Roth IRA. Contributions can be withdrawn at any time without a tax consequence or penalty. Only earnings need to stay until 59.5 to avoid taxes. If you use a Roth for part of your savings, just keep really good track of your contributions since you might pull money out before 59.5z
The Foreign Earned Income Exclusion FEIE is just that and it is all or nothing. The OP makes less than the FEIE, which means they have no earned income left after the exclusion. No earned income = no compensation = no IRA contributions allowed.

crre
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Re: Do I need retirement accounts if my deductions are already high?

Post by crre » Sat May 25, 2019 12:32 am

Am I missing anything? I tend to do my own taxes even though it's not my field. But this matter seems straightforward and advantageous from what I understand.

i get what you are saying. since you pay no taxes on your income, you might as well put any savings into taxable accounts. makes a lot of sense. however:

probably you are missing multiple things. you say you pay no capital gains tax due to the foreign earned income exclusion. i also live abroad and learned this year that the tax treaty between my country and the u.s. says that my country taxes capital gains first, before the u.s. this, even though my capital gains were in a u.s. account and i am a u.s. citizen. so i paid a flat 20% capital gains tax to the country where i live, even though i would have paid at a much lower rate if i owed only u.s. taxes.

sounds like you are young, so this next is a bit of information you might not yet have considered: if you leave an inheritance to a non-u.s. citizen and that money is located in the u.s., the estate tax exemption is only $60,000 (sixty thousand dollars), vs. 11 million or so if the money is left to a u.s. citizen. either find a u.s. citizen partner or plan carefully around that one.

crre
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Re: Do I need retirement accounts if my deductions are already high?

Post by crre » Sat May 25, 2019 12:34 am

The Foreign Earned Income Exclusion FEIE is just that and it is all or nothing. The OP makes less than the FEIE, which means they have no earned income left after the exclusion. No earned income = no compensation = no IRA contributions allowed.

as assyadh wrote, using the foreign tax credit instead of the foreign earned income exclusion could be a solution to this.

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