IRA Contributions for Tax Free Government Employees??

[PsyopRanger]

I have a colleague who is a government employee overseas (not in a war zone) but his pay is tax free up to a certain amount, he also receives a military pension.

Can he contribute to an IRA?

At first I said no because he has no taxed earned income but is there an exception or loophole that I missed?

 

[azanon]

of course he can.

Your better question would have been should he even want to put it in an IRA since it already is, as you say, tax free. He would get the other advantage of IRAs which is tax free compounding.

Anyone with earned income (not to be confused with just taxable income) can have an IRA.

 

[Nords]

I have a colleague who is a government employee overseas (not in a war zone) but his pay is tax free up to a certain amount, he also receives a military pension.
Can he contribute to an IRA?
At first I said no because he has no taxed earned income but is there an exception or loophole that I missed?

Good question. I presume you're asking because his W-2 would reflect zero earned income. In the past we've put most of spouse's income in the TSP so that her W-2 also reflected insufficient earned income to max out an IRA.

Congress just fixed the tax-free combat-zone pay issue for military IRAs this year. Your colleague might want to Google military IRAs (or browse the subject at Military.com) and see if that legislative fix also applies to him.

Is it relevant? Is he already maxing out his TSP contribution?

 

[PsyopRanger]

He is already maxing the TSP and wants to continue to contribute to his Roth.

 

[eridanus]

No.

http://www.irs.gov/publications/p54/ch05.html#d0e5882
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Contributions to your individual retirement arrangements (IRAs) that are traditional IRAs or Roth IRAs are generally limited to the lesser of $4,000 ($4,500 if 50 or older in 2005) or your compensation that is includible in your gross income for the tax year. Therefore, do not take into account compensation you exclude under either the foreign earned income exclusion or the foreign housing exclusion. Do not reduce your compensation by the foreign housing deduction.
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Edit: Obviously, if he has earned income above the FEIE, he can have an IRA.

 

[Nords]

I have a colleague who is a government employee overseas (not in a war zone) but his pay is tax free up to a certain amount, he also receives a military pension.

Lance, your colleague may want to dig into his TSP contributions some more. Here's a paragraph from Military.com's weekly update:

"One way to save for retirement is to place money into the Thrift Savings Plan (TSP). The TSP blah blah blah. For individuals in career fields who still receive re-enlistment bonuses, they may place up to $42,000 -- tax free, of course -- into their TSP accounts. All money placed into a TSP account in a tax-exempt combat zone is also tax-exempt when it is withdrawn. For more information, visit the Thrift Savings Plan website."

The implication is that tax-free income placed into a tax-deferred account may still be able to be withdrawn tax-free. It'd be necessary to track the basis of the TSP contributions...

I learn something new every month or two from those Military.com e-mails, and "The Military Advantage" is the best benefits book I've ever read.