residence overseas, IRAs and Roth IRAs

[Guest jjjer]

I am an American living and working overseas although I keep my assets in the U.S. I would like to minimize my tax burden by putting the maximum allowable amount into Roth IRAs each year. Can I do that if I declare myself self-employed (as I am)? Does my income have to be earned in U.S. dollars in the U.S. or can it be earned in another currency? Thank you.

[Appleby]

Foreign earned income is not eligible compensation for purposes of establishing and funding an IRA.

The type of currency in which you are paid is not a determining factor for IRA eligibility- the determining factor is whether the income is US income.

[mbozek]

US citizens working abroad can exclude about 80k of income from us taxation. If you have w-2 income for tax purposes you can open a roth IRA even if you are self employed and pay no us taxes. Self employed persons have net earnings from self employment not w-2 income.

[Guest mcdonnell]

Foreign earned income is included in modified AGI for purposes of establishing and funding a Roth IRA.

Foreign earned income in Excess of the foreign earned income exclusion amount is considered eligible compensation for purposes of making deductible contributions to a traditional IRA.

[Guest jjjer]

thank you for your replies. This is jjjer who asked the original question. Unfortunately your answers are contradictory so I'll have to find someone else to ask. Some of my income is in the form of a salary, but that is from the foreign employer and earned in the country I live in. I thought maybe I could consider self-employed income as if it were American. Anyway, thanks but I'll see what an accountant over here says.

[JAMES PATRICK]

I don't think the answers were contradictory, they just weren't clear enough to you.

You must have taxable compensation to contribute to an IRA. You can claim an exclusion from US taxes on about $80k of foreign earned income and as that income is not taxable you can not use it to fund an IRA.

If you are single and earn over $80k then the portion over $80 and less than $95k can be used to fund a Roth, after $95k and until $110k you begin to reduce the amount that can be contributed ($3000) until it is reduced to zero at $110k and above. It is not really that simple because if you also have earnings from other sources the amount that can be contributed may be further reduced.

So the answer to your question really depends on your marital status, total earnings, deductions taken for foreign housing and a few other items I am sure I overlooked.

[GBurns]

jjer

Other similarly situated persons that I have come across who also would not have understood these answers all had a common problem ... they were not filing a US Form1040 etc under the mistaken assumption that since they were in a foreign country they did not have a reporting obligation because their money was being earned and paid by a foreign based employer etc etc.

Have you been filing your required US tax returns? If yes, read the answers again, look at the forms filed for the sections re IRAs etc ,and get the IRS Publication which will explain further.

If, as seems very likely, that you have not been filing, seek competent tax advice ASAP.

[Guest lmccormick]

I realize this is old but I am hoping for guidance and info on this same topic. I am an employer who will have several U.S. folks providing services in IRAQ. They will be able to exclude up to 80K as foreign earned income for federal filing purposes.

We have a SIMPLE-IRA plan. How in the heck will this work? For instance let's say the total annual compensation for an employee is: 120K. He will be excuding 80K (except this is only potentially depending on how long he's in the country etc...). If he decides to max out his contribution (10,000 per year) and we are matching at 3% is it 3% of the entire annual compensation or 3% of the amount which exceeds 80K?