Excluded income = No IRA?
All of my foreign earned income is excluded using a 2555 (physical presence). Is there any way to contribute to either a Roth or Traditional IRA?
Thanks in advance…
All of my foreign earned income is excluded using a 2555 (physical presence). Is there any way to contribute to either a Roth or Traditional IRA?
Thanks in advance…
Permalink Submitted by Alan Spross on Fri, 2008-02-29 17:21
Not in this situation where your taxable compensation is fully offset by the foreign earned income exclusion. In addition, you cannot opt to exclude less than 100% of the foreign income if you exclude any of it. If you are married, and your spouse has eligible income, you might qualify for a spousal IRA contribution.
You also might be able to convert any current TIRA amounts to a Roth, but again the foreign earned income must be added back to your AGI for purposes of determining if you fall under the 100,000 threshold that applies through 2009.
Permalink Submitted by John Frederick on Fri, 2008-02-29 18:09
I was afraid of that. Glad you mentioned the part about having to offset 100% because I was thinking about that as well.
Thanks for responding.
Permalink Submitted by Terry Eusebio on Mon, 2009-04-20 14:45
Hi, I’d like to expand on the original question submitted by John. I file Form 2555 each year (since 2005) and I’m also retired US military. I pay 7.5% in Federal taxes each year on my retired pay. I own a Traditional IRA and my wife owns, but I fund it, a spousal Traditional IRA (opened in 2008).
Since a majority of my income is excluded via Form 2555 but I pay Federal taxes on my military retired pay, am I allowed, under current (2009) laws/rules, to open and fund a Roth IRA? May I open and fund a spousal Roth IRA for my wife (she is a homemaker) if I may not open and fund one for myself? If the current (2009) laws/rules prohibit me/us from opening and funding a Roth IRA, in 2010 will the laws/rules change to allow folks like us to fund Roth IRAs (my wages are six figures)?
Sidenote: My company offers a Roth 401K. What would be the benefit to contributing to it versus contributing and maintaining my current regular 401K?
Any info you can share with me, and perhaps others who are in a similar situation as I, would be appreciated.
Thank you.
Terry
Permalink Submitted by Alan Spross on Mon, 2009-04-20 19:58
Terry,
You may well have a problem with no taxable compensation with which to fund regular IRA contributions for either you or your spouse. Retirement pensions do not qualify as taxable compensation and your only taxable compensation is erased by the foreign earned income exclusion, unless it is greater than the amount of the exclusion. That being the case, you may have excess IRA contributions for both of you for years that you have been making IRA contributions under the described circumstances.
Per Pub 590, p 8 – Taxable compensation does not include pension income or income excluded from taxes by the foreign earned income or housing cost exclusions. The only exception is certain non taxable combat pay going as far back as 2004. If you have 2008 excess contributions, you can still correct the 2008 contributions up to 10/15/2009 and avoid any excise tax on them for 2008, providing that you filed your 2008 return on time or filed an extension.
With respect to the Roth option vrs the pre tax option on your 401k, the primary factor should be the tax rate you are paying now vrs your expected rate in retirement. If you are paying only 7.5% now, the chance would appear good that the foreign income exclusion is generating an opportunity to increase your Roth contributions in relatively low tax rate years. Since you can split your contribution between Roth and pre tax, perhaps going heavier on the Roth or exclusively Roth is your best choice as long as you remain in such a low bracket. Note that any matching contributions always go into the pre tax account.
Permalink Submitted by Terry Eusebio on Wed, 2009-04-22 06:39
Hi Alan-Oniras, Thanks for the information. I need to digest it, and take a closer look at my tax forms for 2005-2008. I’ll be back with additional questions. I thought I was doing the legally correct thing by funding my IRA and my wife’s IRA for our eventual retirement. I’ll be returning soon to this topic.
Again, Thanks.
Terry