Expat income and 401(k)

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labishop
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Expat income and 401(k)

Post by labishop »

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 »

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 »

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 »

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
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in_reality
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Re: Expat income and 401(k)

Post by in_reality »

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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Re: Expat income and 401(k)

Post by Dale_G »

But it is the case for 401k contributions?
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CFM300
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Re: Expat income and 401(k)

Post by CFM300 »

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 »

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 »

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 »

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 »

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 »

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 »

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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Re: Expat income and 401(k)

Post by Jill07 »

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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Geographer
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Re: Expat income and 401(k)

Post by Geographer »

I wanted to follow up with this post to see if there's any update on if this is allowed. I'm considering a job in Europe which would be completely exempt from taxes under the FEIE, with a US company, and will be allowed to contribute to a 401k. If Roth contributions are allowed (and even mega backdoor roth contributions!!) then this would be a massive benefit.
Money Market
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Re: Expat income and 401(k)

Post by Money Market »

Why not just take the foreign tax credit and not have to worry about any of this, assuming your taxes paid in Europe exceed your US tax liability?
occambogle
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Re: Expat income and 401(k)

Post by occambogle »

Also wondering about this situation, and hoping someone could help me get my head around some of the issues... My situation:

- US citizen living abroad permanently and paid directly by a US employer.
- For the last 8 years I have been paying up to the max of the traditional 401k limit in pre-tax contributions into my employer's 401k plan, with company match, which goes into a Target Date fund at Vanguard.
- I earn a bit above the FEIE which I claim but after other allowances such as housing and the 401k paycheck deductions I am about even and usually owe no tax or something very little.

Am I making a big mistake contributing to this traditional 401K?
When it comes time to withdraw funds would they be subject to standard income tax on the whole amount, i.e. contributions + gains, even if my tax bracket is lower then? And in retirement I couldn't claim FEIE on withdrawals because they are non-earned income?
Would I be better not paying into a traditional 401k and instead paying into a taxable account where eventually I'd be taxed only on the gains at long-term capital gains rates?
I don't know if my employer offers a Roth 401k, but would that be better?

It's very confusing....
CFM300
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Re: Expat income and 401(k)

Post by CFM300 »

occambogle wrote: Sun Jan 12, 2020 12:19 am Am I making a big mistake contributing to this traditional 401K?
When it comes time to withdraw funds would they be subject to standard income tax on the whole amount, i.e. contributions + gains, even if my tax bracket is lower then? And in retirement I couldn't claim FEIE on withdrawals because they are non-earned income?
Would I be better not paying into a traditional 401k and instead paying into a taxable account where eventually I'd be taxed only on the gains at long-term capital gains rates?
I don't know if my employer offers a Roth 401k, but would that be better?
I'm not an expert, but I assume that you will have to pay taxes when you withdraw the funds because they are in a Traditional 401(k).

If your taxable earnings after subtracting your FEIE and additional deductions are zero, then contributions to a Traditional 401(k) do nothing for you except create a future tax liability. So in that case, you'd be better off with a Roth 401(k), especially if you can still get the employer match. If your employer doesn't offer a Roth option and the only way that you can get the match is by contributing to a Traditional, then it would make sense to contribute up to the amount of the match, with any additional savings going into a taxable account.

If you still have some taxable earnings after subtracting your FEIE and additional deductions, then Traditional 401(k) contributions up to that amount will keep your current tax liability at zero. Beyond that, the same logic as above applies.
occambogle
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Re: Expat income and 401(k)

Post by occambogle »

Firstly, thanks a lot for the reply....
CFM300 wrote: Sun Jan 12, 2020 1:17 am If your taxable earnings after subtracting your FEIE and additional deductions is zero, then contributions to a Traditional 401(k) do nothing for you except create a future tax liability.
Ugh, great... For most of the time I have contributed to this 401k my taxable earnings after FEIE were zero. But I had found it virtually impossible to open a standard brokerage account anywhere as most international brokers refused me due to non-residence status in their country and/or US citizenship, and most US brokers refused me due to non-residence in US. Finally I now have a taxable brokerage account thanks to Interactive Brokers.
CFM300 wrote: Sun Jan 12, 2020 1:17 amSo in that case, you'd be better off with a Roth 401(k), especially if you can still get the employer match. If your employer doesn't offer a Roth option and the only way that you can get the match is by contributing to a Traditional, then it might make sense to contribute up to the amount of the match, with any additional savings going into a taxable account.
I need to find out if employer offers Roth 401k, I haven't heard any mention of it. If removing the pre-tax contributions to Trad 401k increased my taxable earnings so that this extra 19k became taxable, would it still be worth contributing to Roth 401k?
CFM300 wrote: Sun Jan 12, 2020 1:17 am You'd need to do some calculations on a spreadsheet comparing the benefit of the match vs. the cost of the future taxes.
It sounds like I do, but I've no idea how to make such calculations. Is there some existing spreadsheet or online source I could use that incorporates FEIE?
CFM300 wrote: Sun Jan 12, 2020 1:17 am If you still have some taxable earnings after subtracting your FEIE and additional deductions, then Traditional 401(k) contributions up to that amount will keep you current tax liability at zero. Beyond that, the same logic as above applies.
So if keeping the Trad 401k contributions kept my tax liability at around zero, but without them I would have tax on that amount, it still might be worth keeping the pre-tax deductions to Trad 401k... vs into a Roth 401k or taxable account?

One thing I don't really get.... If Trad 401k withdrawals upon retirement are subject to normal income tax rates and without being able to be excluded by FEIE then, how are they advantageous over long-term capital-gains rates if that same money had been invested in taxable account?

Thansk again....
jsprag
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Re: Expat income and 401(k)

Post by jsprag »

I recently began working overseas for US employer and have been struggling to find definitive answers to many of the same questions.

I'm far from an expert, but from what I've been able to learn...
occambogle wrote: Sun Jan 12, 2020 12:19 am Am I making a big mistake contributing to this traditional 401K?
It might not have been optimal, but probably not a "big" mistake if the 401k deductions have kept your MAGI near or below the FEIE+FHE limits and resulted in little or no income taxes.
occambogle wrote: Sun Jan 12, 2020 12:19 am When it comes time to withdraw funds would they be subject to standard income tax on the whole amount, i.e. contributions + gains, even if my tax bracket is lower then? And in retirement I couldn't claim FEIE on withdrawals because they are non-earned income?
Yes - because they were pre-tax deductions, you have no tax cost basis. All distributions, including your original contributions and growth, will be subject to tax as ordinary income.
occambogle wrote: Sun Jan 12, 2020 12:19 am Would I be better not paying into a traditional 401k and instead paying into a taxable account where eventually I'd be taxed only on the gains at long-term capital gains rates?
Maybe. Work up a "what-if" scenario in some tax planning software and go through the 2555, FEIE worksheet, and 1040 on both to see. If you're hovering around zero tax burden with a deductible 401K contribution, then without the deduction your MAGI would increase by approx the amount of your current contribution (let's say $19K).

Because of the stacking rule, tax on that $19K "increase" to earned income will likely be 22-24%.

So...would you rather have
  • $19K in an employer plan with all future distributions subject to tax as ordinary income, or
  • About $14.5K in a taxable investment account only subject to capital gains (and maybe dividend) taxes?
occambogle wrote: Sun Jan 12, 2020 12:19 am I don't know if my employer offers a Roth 401k, but would that be better?
Probably. If you can exclude income from current taxation (under FEIE+FHE) and future taxation under Roth, then that would almost certainly be better. Roth IRA contributions explicitly not allowed from excluded income, but I've found nothing from IRS on Roth 401k (also previously asked on Bogleheads here, but there were no replies). My financial advisor couldn't answer, so I probably need to find a new one with some expat experience.

Company benefits office told me that (a) they're happy to enroll me in Roth 401k, and (b) they do NOT provide tax advice or otherwise ensure that my elections are permissible under my unique tax situation, so that was no help.

occambogle wrote: Sun Jan 12, 2020 1:32 am It sounds like I do, but I've no idea how to make such calculations. Is there some existing spreadsheet or online source I could use that incorporates FEIE?
If you PM me your e-mail address I'll send the Excel workbook I built to compare.
occambogle wrote: Sun Jan 12, 2020 12:19 am It's very confusing....
Agreed! I'm in the fortunate position of also not being subject to host country taxes, so on the far side of the confusion and complexity there is some great opportunity.
occambogle
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Re: Expat income and 401(k)

Post by occambogle »

Awesome answers, thank you for taking the time. Seems my contributions weren't optimal for around half the years I have contributed, but the other half may have reduced my MAGI to keep under the limit so I avoided some taxes.
jsprag wrote: Sun Jan 12, 2020 5:04 am Because of the stacking rule, tax on that $19K "increase" to earned income will likely be 22-24%.
So...would you rather have
  • $19K in an employer plan with all future distributions subject to tax as ordinary income, or
  • About $14.5K in a taxable investment account only subject to capital gains (and maybe dividend) taxes?
Hmm, good question. I guess I'd have to compare like for like long-term. Also complicated by not knowing which country I will retire in and therefore whatever laws/treaties apply when I do. I'd rather have $19k in an account that's tax-free forever I guess :-)
jsprag wrote: Sun Jan 12, 2020 5:04 am Probably. If you can exclude income from current taxation (under FEIE+FHE) and future taxation under Roth, then that would almost certainly be better. Roth IRA contributions explicitly not allowed from excluded income, but I've found nothing from IRS on Roth 401k (also previously asked on Bogleheads here, but there were no replies). My financial advisor couldn't answer, so I probably need to find a new one with some expat experience.
I've been reading up on that too, but also couldn't see definitive answer. I'm due to have a discussion with a financial advisor in a week or two, maybe they will be some help on that and the general aspects.
jsprag wrote: Sun Jan 12, 2020 5:04 am If you PM me your e-mail address I'll send the Excel workbook I built to compare.
That's very kind of you! PM incoming.....
jsprag wrote: Sun Jan 12, 2020 5:04 am Agreed! I'm in the fortunate position of also not being subject to host country taxes, so on the far side of the confusion and complexity there is some great opportunity.
Not subject because of the particular country or because of employer tax-equalization? It's the tax-equalization, which gets US_taxed as an employment benefit, that raises my MAGI above FEIE+FHE threshold, otherwise it would be below, which is confusing to me because it doesn't feel like "real" money.
jsprag
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Re: Expat income and 401(k)

Post by jsprag »

occambogle wrote: Sun Jan 12, 2020 6:13 am
jsprag wrote: Sun Jan 12, 2020 5:04 am Agreed! I'm in the fortunate position of also not being subject to host country taxes, so on the far side of the confusion and complexity there is some great opportunity.
Not subject because of the particular country or because of employer tax-equalization? It's the tax-equalization, which gets US_taxed as an employment benefit, that raises my MAGI above FEIE+FHE threshold, otherwise it would be below, which is confusing to me because it doesn't feel like "real" money.
I fall under NATO agreements which, for my particular work and location, exempt me from host country taxation.
CFM300
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Re: Expat income and 401(k)

Post by CFM300 »

occambogle wrote: Sun Jan 12, 2020 6:13 am
jsprag wrote: Sun Jan 12, 2020 5:04 am Probably. If you can exclude income from current taxation (under FEIE+FHE) and future taxation under Roth, then that would almost certainly be better. Roth IRA contributions explicitly not allowed from excluded income, but I've found nothing from IRS on Roth 401k (also previously asked on Bogleheads here, but there were no replies). My financial advisor couldn't answer, so I probably need to find a new one with some expat experience.
I've been reading up on that too, but also couldn't see definitive answer. I'm due to have a discussion with a financial advisor in a week or two, maybe they will be some help on that and the general aspects.
I know several expats in different countries working for different companies that allow Roth 401(k) contributions. The contributions are made via payroll deduction, so technically they're "pre-tax," even though all (or nearly all) of their income is ultimately excluded by the FEIE. It's quite common.

occambogle, your situation may not be as complicated as it seems.

1. If your employer allows Roth 401(k) contributions with a match, then max that account.

2. If the only way you can get the match is to contribute to a Traditional 401(k), then make contributions up to the full match.

(Supporting example. Say that you're making $100k and your employer will match dollar-for-dollar up to 5% of your income. Let's assume that your investment -- regardless of account -- will double every 10 years, that your capital gains rate in retirement will be 0% and your marginal income tax rate will be 20%. If you invest $5,000 in the Traditional 401(k), your employer matches it with another $5,000. In 20 years, it will be worth $40,000. ($10,000 doubling twice.) When you withdraw it, you'll pay $8,000 in taxes for a net of $32,000. If instead you invest the $5,000 in a taxable account, in 20 years it will be worth $20,000.)

3. If FEIE and your Traditional 401(k) contributions (if any) don't wipe out all of your taxable income, you can make additional Traditional or Roth 401(k) contributions or you contribute to a Traditional or Roth IRA.

4. After all that, if you still have money to invest, do it in a taxable account.
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