mvlee - Expat in Japan, Roth & taxable acct question

[mvlee]

Hello everyone!
First off, I'd like to say I'm impressed with this site and the users here. I scoured the internet trying to find more information on expatriates with Roth IRAs. Most places said that it's illegal to have one for non-residents, which is not true. These forums were the first place where I found other people (e.g. bpp) who actually read the IRS instructions.
I also appreciated ERD50's quick response to my question on another thread about the efficiency of food production in the US with citations and details on the calculations.

There are a lot of questions I could pose. I'll start with:
Recently I called my discount broker with a question and during the call, the representative found that I was a non-resident. She consulted her supervisor and told me that once my permanent address is in Japan (even with a mailing address in the US through my parents), they will no longer hold my account. The reason she cited was that they don't have Japanese support. I emailed Vanguard about moving my account there since I only own their mutual funds and received a similar response about my address. Does anyone know whether this is a legal issue, foreign tax issue, or something completely different? Any suggestions on who is willing and recommended to hold my investments (Roth and Individual investment)?

Thanks for your help.
mvlee

 

[Trek]

It is my understanding that you can have a Roth as a non-resident, you just can't open a new one or continue to add funds into it if you don't have earned income in the US. But if you already have one (opened while a US resident) and move outside the US, there is no reason you can't keep it, but there are negative tax implications if you take the money out as a non-US resident.

There is a forum for British expats in the US and they are always talking about these issues. They move to the US for work and open IRA's and then move back to the UK later.

 

[Trek]

You may find this information more helpful:

Are there any alternatives for American expatriates earning foreign income who wish to fund a Roth IRA? In 2008, the foreign earned income exclusion (FEIE) amount is $87,600. Apparently any foreign earnings that exceed FEIE qualify. In the above example, if you had no W-2 earnings but $95,000 in foreign earnings ($95,000 - $87,600 = $7,400), you could contribute $5,000 to a Roth IRA (MAGI = $95,000). But you cannot reduce FEIE below your foreign earnings to qualify your income for a Roth contribution. Perversely you can opt not to take FEIE in favor of taking 100% of the foreign tax credit. But this avenue can have less favorable tax consequences.

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 $87,600 exclusion can be lowered in the second year if you return to the U.S. Suppose date of return 1 July 2008. The exclusion amount would be reduced by 50%, with foreign income over $43,800 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 2007 through 30 September 2008 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 2007. Twelve months from this date is 20 October 2008, the last day of the 12-month period. The number of days from 1 January through 20 October 2008 is 293. The maximum exclusion is $70,320 (293 / 365 x 87,600). The bona fide presence test is met by residing in a foreign country or countries for a full tax year.

ACA American Citizens Abroad - Foreign Earned Income and Roth IRA Contributions

 

[kaneohe]

My impression is the same as Trek's. Your eligibility depends on your US taxable earned income. If it is protected and not taxed because of the FEIE exclusion, you are not eligible but earned income that is not sheltered by FEIE is eligible for IRAs up to the limit.

 

[LOL!]

Schwab has been mentioned as a broker that may not care about where you live.

 

[knockoutned]

Hi, I am also an American living in Japan, and because of that, I haven't contributed to my Roth IRA since moving here. Unless you have income above the FEIE, you may be out of luck.

Check out the "resources" section of this website for answers to questions you may have:

Overseas Tax Services - Welcome to Overseas Tax Services

Here is a post from the Bogleheads forum with links to expatriate-related topics:

Bogleheads :: View topic - Investing for Foreigners (US, UK/Europe, Japan..)

In what part of Japan do you live?

 

[knockoutned]

...and I forgot to mention, I use Vanguard and have had no problems. I use my parents' address in the States; Vanguard doesn't even know that I'm in Japan. All of my information is delivered through email and the Vanguard website.

 

[lhamo]

I have been living overseas (in China) since 2002, and I have maintained accounts at the following institutions without any problems, using my mom's address (which is also on my driver's license) as my mailing address:

Vanguard (regular and roth accounts, money market account at one point)
American Funds (retirement account from previous employer)
TD Ameritrade (stocks)
Fidelity (new employer retirement account)

I have never told them that I am an overseas resident -- and they have never asked. I try to do as much as I can via email or fax, partly because I don't like to do things over the phone (like a paper trail). But I rarely need to contact customer service. Always use my US address in correspondence -- never the Chinese one.

I usually spend one or two weeks in the US on business every year, so I contribute that US-source income to a Roth once I figure out how that works. There doesn't seem to be any problem with contributing to the 403b plans my employers have set up from my base salary -- it just lowers the W2 wages I use to calculate the FEIE.

lhamo

 

[kaneohe]

I usually spend one or two weeks in the US on business every year, so I contribute that US-source income to a Roth once I figure out how that works.

lhamo

Ilhamo........I'm a little confused by your statement here. It seems to be saying that you can attribute certain wks of income as being US-sourced. I thought if you stayed long enough overseas during the year, that all your earned income from that job could be regarded as FEIE and could only be used for an IRA if it exceeded FEIE and you wouldn't have to spend any time in the US to be eligible.

 

[lhamo]

I am not a tax professional, so take anything I say with a grain of salt.

My understanding of the IRS rules is that as long as you meet the qualifications for filing for the FEIE (meeting either the physical presence or bona fide residence test), you can exclude your foreign earned income (up to the stated limits) from US income tax, but, at the same time, any income you do earn from work in the US during the year is considered US-source income and therefore can be contributed to a Roth or regular IRA (subject to the usual limits). This is particularly advantageous if 1) you don't have salaries that exceed the FEIE limits (true in our case) and 2) you only work a limited time in the US each year. It is much easier if you have established a bona fide residence overseas -- gets trickier if you are trying to keep yourself within the total days in the US limit to qualify under the actual physical presence rules. In our case we don't general spend enough combined time in the US to make that an issue.

My understanding is also that you must have US-source earned income in order to contribute to a Roth or regular IRA, but contributions to a 401k or 403b plan do not have to be from work in the US.

So what we are currently doing is:

1) Contributing the maximum to our US employer-sponsored retirement plans. We don't get a significant tax break in the US for doing this, but there is enough of a break on local taxes (as only net paycheck is taxed here) that it works out better overall. This also ensures that both DH and I have W2 wages that are below the FEIE limits (more important for DH than for me, because he also gets taxable allowances for housing, kids schooling, etc. that might push him above the FEIE limits if he didn't have the retirement deductions being taken out).

2) Contribute full amounts of any US-source income to a Roth. This is usually only in the range of US$1-3k, depending on how many work trips we make (DH sometimes makes more/longer trips than I do).

We have two kids, and our standard deduction is usually large enough that we do not owe any tax on our US earned income and investment returns.

So far we have never had FEI that exceeded the limits, so I haven't really looked into how the rules apply there. Though I did discover when I got a fellowship a couple of years ago that they now tax your income in excess of the FEIE at whatever rate your overall tax rate would be on global income -- that was a nasty surprise (I don't think it worked that way until two or three years ago)!

I hope this makes reasonable sense. As I said, I'm not a tax professional, so if I am not understanding things correctly please let me know!

lhamo

 

[kaneohe]

Ihamo.......sorry for putting you thru the inquisition and having to write that tome
(and misspelling your name in addition). Not a tax professional either and just an illustration of a little learning being a dangerous thing. Have a friend who works overseas so have a cursory knowledge of this issue and have some interest in learning.
Never have actually filled out a 2555EZ and hadn't thought about being able to attribute visits back to the US as US-sourced income. I suppose that came from my friend's visits back here usually coinciding w/ holidays and visits w/ family/friends even tho there were always visits to the home office. Just re-looked at 2555EZ and saw col. D
in line 12(?) that clearly is calculating , as you mentioned, US source income from visits back to the US so I believe you are correct. Thanks for the education and again sorry to have put you thru the ordeal.