Roth IRAs for Americans Living/Working Abroad

The Roth individual retirement account (IRA) is a versatile retirement tool. Contributions can be taken out at any time without penalties. Your earnings grow tax-free and can be withdrawn tax-free in retirement. Also, you can still contribute to a Roth IRA when living or working abroad, as long as you meet certain criteria.

Key Takeaways

• People living or working abroad can contribute to Roth IRAs the same way as people living in the U.S.
• If you’re living or working abroad, make sure you have enough earned income after claiming the foreign earned income exclusion to contribute to a Roth IRA.
• You can still have a spousal IRA if you’re living abroad but don’t have your own earned income, as long as your spouse has enough earned income for both of you to contribute.

What Is a Roth IRA?

A Roth IRA is a type of retirement savings account that has tax advantages and distinct differences from other retirement accounts. For example, a traditional IRA offers an upfront tax deduction in the amount of your contribution, reducing your taxable income in the year of the contribution. However, you pay income taxes on your withdrawals in retirement.

Roth IRA Tax Treatment

Conversely, Roth IRAs do not offer an upfront tax deduction. Instead, the money grows tax-free over the years, and you can withdraw the funds tax-free once you reach age 59½.

Since you didn’t receive an upfront tax deduction, contributions to Roth IRA accounts can be withdrawn at any time tax-free, and rollover contributions can be withdrawn tax-free after five years. However, your investment earnings or gains on those contributions cannot be withdrawn before age 59½ without a hefty tax penalty from the Internal Revenue Service (IRS).

Roth IRAs can also be tax-free for an heir, which can make your contributions a form of life insurance for your family.

Roth Contribution Limits

Roth and traditional IRA contribution limits for 2024 are $7,000 for individuals under age 50. Individuals age 50 and older can contribute an additional $1,000 as a catch-up contribution.

Roth Income Limits

You cannot contribute to a Roth IRA for 2024 if you earn more than the individual income limit of $161,000 or, for a couple filing jointly, an income over $240,000.

Fast Fact

In 2024, you can contribute up to $7,000 per year to a Roth or traditional IRA. If you’re 50 or older, you can contribute an additional $1,000 per year.

Can You Contribute to a Roth IRA If You Live or Work Abroad?

If you are a U.S. citizen or permanent resident living or working abroad, you can contribute to a Roth or traditional IRA as long as you meet certain requirements. There are income caps on eligibility for a Roth IRA.

Earned Income

You must have earned income to contribute to a Roth or traditional IRA. To determine if you have enough earned income to contribute to a Roth IRA, the Internal Revenue Service (IRS) will look at your modified adjusted gross income (MAGI).

Expats who have income from working in the U.S., whether from a job before they left, business trips to the U.S., or compensation from the U.S. government, usually have earnings that are close to their MAGI. 

For MAGI purposes, many expats or citizens living abroad will take the foreign housing and foreign earned income exclusions. These exclusions usually reduce MAGI significantly and could make some ineligible to contribute to a Roth IRA. For 2024, the foreign earned income exclusion is on the first $126,500 earned in a foreign country. This increases to $130,000 for 2025.

Consult with your tax preparer to see if taking a partial exclusion would be possible or advisable in your situation.

Can I Withdraw Money From an IRA While Living or Working Abroad?

Yes, you can take money out of your Roth individual retirement account (Roth IRA) while you’re living or working abroad.

The same Roth IRA withdrawal rules apply to people living in the U.S. and apply to U.S. citizens or permanent residents living abroad. Standard contributions can be withdrawn from your Roth IRA at any time. Rollover contributions can be withdrawn from your Roth IRA after five years. Earnings or investment gains in your Roth IRA can only be withdrawn without penalty if you’ve held the account for at least five years and you’re age 59½ or older.

What Is the Annual Deadline to Contribute to a Roth IRA?

You can contribute to a traditional or Roth IRA through the tax filing deadline for that year. In most years, the deadline is April 15, unless that date falls on a holiday or a weekend.

Can I Contribute to a Spousal IRA While Living or Working Abroad?

If you are part of a married couple who file jointly and live abroad and the modified adjusted gross income (MAGI) on your tax return is more than $14,000, you can both contribute up to $7,000 to your individual IRAs for 2024.

If you’re age 50 or older, you can add $1,000 as a catch-up contribution. Your contributions can’t exceed your taxable compensation, meaning if one of you is 50 or older, you can add $15,000, and if both are over 50, you can add $16,000 in total. However, even if one spouse had zero earned income, the couple can contribute to a spousal IRA.

The Bottom Line

You can contribute to a Roth IRA if you’re a U.S. citizen or permanent resident living or working abroad as long as you have enough earned income after any tax exemptions and you don’t earn more than the earned income limit. 

Roth IRAs are a powerful tool to save for retirement and for emergencies in a worst-case scenario. If you don’t yet have one, you may want to strongly consider opening one if you’re eligible.

Read the original article on Investopedia.