Roth contributions on foeign income?
Can a US citizen working abroad who’s income is “sheltered” by the foreign income exclusion make a Roth IRA contribution?
Thanks
Is all foreign income excluded from “compensation” for Roth contribution pruposes or only the amount excluded under 911? So if I have $5,000 above the exclusion amount I can contribute?
Thanks
From my understanding, IRA contributions are based on EARNED INCOME. The IRS/Treasury wants to make sure the contribution is based on income that has been properly taxed. The rule of thumb I explain to clients for 401k and IRA contributions is whatever income you have paid Medicare on. (Since SS caps out.)
In this case I think you are out of luck.
If you make more than you are allowed to exclude, you can use the excess amount as earned income to make an IRA contribution. You could also elect the income exclusion but not the housing exclusion or vice versa. What you cannot do is elect an exclusion, but limit the election to less than you are eligible to take in order to leave enough for an IRA contribution.
Alan,
I don’t know how this works in operation but are you saying that his contribution is exempt from SS/Medicare?
No, my point is that if the foreign earned income exclusion is 91,500 and employee makes 96,500, he has 5,000 available for an IRA contribution. The other point is that if the employee made 65,000 and elects the exclusion, the election must apply to the entire income up to the 91,500 limit. He could not elect an exclusion of 60,000 in order to have 5,000 available for an IRA contribution.
But if there is also a housing exclusion, which is capped at 16% of 91,500 or 14,640, he might opt for the income excluson but NOT the housing exclusion. He would then have to include the amount of his housing exclusion in income, but could use that for an IRA contribution.
If you elect either exclusion, it must apply for the max allowable, but you are allowed to elect only one of the exclusions.
The best scenario for someone who makes less than 91,500 would be to be offered a small housing allowance of 6,000. Taxpayer would then simply not elect the housing exclusion and have up to 6,000 available for an IRA contribution.
Permalink Submitted by Joseph Arsenault on Tue, 2010-03-30 17:19
Foreign earned income is excluded from U.S. income under Code Section 911, and excluded from compensation for purposes of IRA contributions.