Hi - Expat hoping to retire in 10 years

[chonga]

Hello All - I came upon this group by accident and now it has me dreaming of the day I will retire. I am 45 years old and I hope to retire at the age of 55. By that time, my 2 sons will have graduated college and our mortgage will be paid off. My wife and I are US citizens but have been living outside of the US for over 13 years, and not contributing to SS or any IRA or other tax deferred plans.

My question is, can I invest in any US Tax Deferred plans such as a ROTH IRA or Mutual Funds even though I do not have a US Income? We file our US Taxes every year on our Panamanian salaries (as required by US law). I also have an existing Schwab account that I can use.

Thanks in advance.

Andrew

[Ed_The_Gypsy]

The only problem I can see is, unless you have an existing account with Vanguard (or ?), you may not be able to get any mutual fund company to take you. I may be wrong--check. You may just have to save it in a normal (maybe non-US) brokerage account. I live and and work in Baku, and I couldn't set up a new account with Vanguard. (I tricked them, but my trick will not work for you.)

We have an on-again-off-again poster by name of Galeno, a very clever Costa Rican native, an MD who has worked in the US. Perhaps you can PM him for advice.

[chonga]

Hi Ed, thanks for the reply. I already have an active Schwab account.

I was just wondering if I was eligible to invest in tax deferred mutual funds based on my non-US earned income. Even though it is non-US income, I do file my US taxes each year and declare that income.

Thanks,

Andrew

[nun]

Quote:

Originally Posted by chonga Hi Ed, thanks for the reply. I already have an active Schwab account. I was just wondering if I was eligible to invest in tax deferred mutual funds based on my non-US earned income. Even though it is non-US income, I do file my US taxes each year and declare that income. Thanks, Andrew

To invest in a ROTH you need earned income....it doesn't matter where it comes from. So you need to declare earned income on your US tax return so people who earn less than the foreign earned income exclusion limit and use the FEIE to exclude their foreign income from US taxation cannot contribute to a ROTH. But if they have earned income in excess of the FEIE limit or use foreign tax credits and meet the income requirements then they can contribute to a ROTH.

The practical difficulty might be opening a ROTH with a foreign address and the tax treatment of the ROTH by your residence country.

[chonga]

Thanks Nun! We earn less than the FEIE so it looks like we can't use ROTH.

I will look at other alternatives. Thanks again!

[nun]

Quote:

Originally Posted by chonga Thanks Nun! We earn less than the FEIE so it looks like we can't use ROTH. I will look at other alternatives. Thanks again!

The ROTH is not an option only if you use the FEIE to exclude all your income. If you used foreign tax credits the ROTH would be possible as you'd report earned income on your 1040.

What are the alternatives you are thinking about. If they are tax advantages investments outside the US be careful as they are probably not tax advantages for US tax purposes.....unless you get into expensive insurance products.

[papadad111]

Roth etc are only available to those with usa based active income. Not even real estate income typically is qualified as it is considered passive income. As an expat typically your income I'd foreign based unless you worked a certain number of days in the USA in which case that earning will qualify dollar for dollar toward an Roth / Trad IRA.

Tax free gains of a roth are excellent tac benefit but you might consider tax rate differences in your expat country vs usa tax rates and taking advantage of the sec 911 IRS FEIE income exclusion.

If me, would not get too uptight about not being able to contribute to IRA. By not paying into SS, you are already ahead of the game in my opinion. After tax returns especially long term gains can be very low tax ..... Till rules get changed and there is NO guarantee that Roth or other will remain totally tax free. Rules can always change !!!!!

[nun]

Quote:

Originally Posted by papadad111 Roth etc are only available to those with usa based active income. Not even real estate income typically is qualified as it is considered passive income. As an expat typically your income I'd foreign based unless you worked a certain number of days in the USA in which case that earning will qualify dollar for dollar toward an Roth / Trad IRA.

This is incorrect. To contribute to a ROTH you need to have earned income on your 1040, it doesn't matter where the income is earned.

You will need to work out whether your best strategy is to use foreign tax credits or the FEIE. Using the tax credits is usually a good idea if your residence country has similar or greater tax rates than the USA and it will allow you to make ROTH contributions. Make sure you understand how your residence country treats the ROTH.

[papadad111]

Nun. I respectfully disagree - simply having 1040 income does not qualify one for Roth ...income must be qualified :

* For 2011 the maximum contribution limits are $5,000 per person ($6,000 if over 50), based on qualified income; compensation must be at least equal to the contribution limit.

Qualified income includes wages and salaries, self-employment income, alimony, commissions, and non-taxable combat pay.* It does not include earnings from properties, interest or dividend income, pension or annuity income, deferred compensation, or income from certain partnerships. Nor does it include amounts excluded by the foreign earned income or housing exclusion (which are added to adjusted gross income for MAGI purposes).*

Contribution amounts for anyone with a retirement plan at work may be phased out as modified adjusted gross income (MAGI) levels rise according to filing status.


FEIE depends on foreign residence: bona fide or physical presence. In either case, the taxpayer must first qualify before any FEIE is available.* Once qualified as a foreign resident, the $92,900 exclusion can be lowered in the second year if you return to the U.S.* Suppose date of return 1 July 2011.* The exclusion amount would be reduced by 50%, with foreign income over $46,450 qualifying for Roth purposes. But subsequently the tax filer would have to re-qualify for the exclusion under the bona fide or physical presence tests.

During the qualification or re-qualification period, the physical presence test allows any 330 day period in a 12-month period. So suppose you are physically present in France, except for a 15 day vacation in December to the states, from 1 June 2010 through 30 September 2011 during which you earn $88,000.* To calculate the exclusion, count 330 full days backward from 30 September. Not counting the vacation days, 330 days is 21 October 2010.** Twelve months from this date is 20 October 2011, the last day of the 12-month period. The number of days from 1 January through 20 October 2011 is 293. The maximum exclusion is $74,570 (293 / 365 x 92,900). The bona fide presence test is met by residing in a foreign country or countries for a full tax year. *

(Revised April 2012)

Barron Harper
www.taxbarron.com

[nun]

Quote:

Originally Posted by papadad111 Nun. I respectfully disagree - simply having 1040 income does not qualify one for Roth ...income must be qualified : * For 2011 the maximum contribution limits are $5,000 per person ($6,000 if over 50), based on qualified income; compensation must be at least equal to the contribution limit. Qualified income includes wages and salaries, self-employment income, alimony, commissions, and non-taxable combat pay.* It does not include earnings from properties, interest or dividend income, pension or annuity income, deferred compensation, or income from certain partnerships. Nor does it include amounts excluded by the foreign earned income or housing exclusion (which are added to adjusted gross income for MAGI purposes).* Contribution amounts for anyone with a retirement plan at work may be phased out as modified adjusted gross income (MAGI) levels rise according to filing status. FEIE depends on foreign residence: bona fide or physical presence. In either case, the taxpayer must first qualify before any FEIE is available.* Once qualified as a foreign resident, the $92,900 exclusion can be lowered in the second year if you return to the U.S.* Suppose date of return 1 July 2011.* The exclusion amount would be reduced by 50%, with foreign income over $46,450 qualifying for Roth purposes. But subsequently the tax filer would have to re-qualify for the exclusion under the bona fide or physical presence tests. During the qualification or re-qualification period, the physical presence test allows any 330 day period in a 12-month period. So suppose you are physically present in France, except for a 15 day vacation in December to the states, from 1 June 2010 through 30 September 2011 during which you earn $88,000.* To calculate the exclusion, count 330 full days backward from 30 September. Not counting the vacation days, 330 days is 21 October 2010.** Twelve months from this date is 20 October 2011, the last day of the 12-month period. The number of days from 1 January through 20 October 2011 is 293. The maximum exclusion is $74,570 (293 / 365 x 92,900). The bona fide presence test is met by residing in a foreign country or countries for a full tax year. * (Revised April 2012) Barron Harper Barron's International Tax Service - Tax Help for Expatriates and Foreign Corporations

I agree with everything you wrote.

You cannot use income excluded under the FEIE to qualify you for a ROTH.
So if you want to contribute to a ROTH as a US expat you don't use the FEIE, you use foreign tax credits. You show your foreign earned income on the 1040 and offset any US tax due with the tax you paid where you live. You use the usual income level rules for ROTH contributions.

[ErikWillems]

Quote:

Originally Posted by chonga Hello All - I came upon this group by accident and now it has me dreaming of the day I will retire. I am 45 years old and I hope to retire at the age of 55. By that time, my 2 sons will have graduated college and our mortgage will be paid off. My wife and I are US citizens but have been living outside of the US for over 13 years, and not contributing to SS or any IRA or other tax deferred plans. My question is, can I invest in any US Tax Deferred plans such as a ROTH IRA or Mutual Funds even though I do not have a US Income? We file our US Taxes every year on our Panamanian salaries (as required by US law). I also have an existing Schwab account that I can use. Thanks in advance. Andrew

Hi Andrew,

Might not exactly help answer your questions, but should be of interest to you

I recently came across this article about Chase Belgrave's State of the Nation Survey 2013 and it's good news as expats should be able to retire earlier! I hope I can a while down the line...

E.