Occasionally we get inquiries from U.S. citizens who are living abroad (Expats), or who are considering moving abroad in their golden years, for one reason or another. Are Expats and Self-Directed IRAs allowed…even living abroad? And can you own assets in foreign countries within a Self-Directed IRA or other retirement account?

The answer, fortunately, is yes, and yes!

There is no U.S. residency requirement for Expats and Self-Directed IRAs, and many owners choose to spend much or all of each year abroad. There are several reasons for this:

1. Cost of living concerns. There are many areas in the world where a dollar goes much farther than it does in the United States.

2. To be nearer to loved ones, friends and family.

3. To oversee business or farming interests abroad.

4. For fun and adventure!

Regardless of your motivations, it is quite possible to own, contribute to and benefit from an IRA – even a Self-Directed IRA, while living abroad. There are, however, a few things you need to be aware of.

Earned Income and Contributions

In order to be eligible to contribute to an IRA, you must be able to show earned income. However, many expats choose to use the foreign earned income exclusion to avoid having their income taxed twice – once by the jurisdiction in which you earned the income, and then again by the United States.

If you choose to apply the FEIE to the entirety of your income, however, you’ll have nothing left over that will qualify as earned income with which to contribute. Indeed, if you try, you may get tagged with over-contribution penalties, which normally amount to 6 percent of the improperly contributed money.

The Foreign Tax Credit

The Foreign Tax Credit is another tool you may be able to use to help manage your overall tax burden. Income taxes you pay to a foreign country’s government – to include U.S. territories. To choose the deduction, you must itemize deductions on Form 1040, Schedule A (PDF). To choose the foreign tax credit you generally must complete Form 1116 (PDF) and attach it to your Form 1040 (PDF) or Form 1040NR.

For more information, see IRS Publication 514, Foreign Income Tax Credit for Individuals.

Treaties

Governments routinely enter into tax treaties with one another that may lead to some tax planning opportunities both inside and outside of your IRAs. It’s important to retain the services of an expert who is familiar with the tax treaties and the issues of importance to U.S. expats in your host country.

FATCA

If you haven’t encountered FATCA yet as an expat, chances are you will before long. FATCA stands for the Foreign Account Tax Compliance Act, and it was enacted to help prevent U.S. citizens and residents from hiding assets abroad from the Internal Revenue Service.

You must fill out an IRS Form 8938 if you are

• A U.S. citizen
• A non-citizen who meets the ‘substantial presence’ test
• A nonresident alien, if you elect to be treated as a resident alien for tax purposes.
• A non-resident alien who is a bona fide resident of Puerto Rico or American Samoa.

AND…

You file a return other than a joint return and the total value of your assets is at least $200,000 on the final day of the year or was at least $300,000 at any point during the year $400,000 and $600,000, respectively, if you’re filing a joint return.

Questions?

Give us a call at 866-7500-IRA(472), or visit us online at www.americanira.com.

We don’t provide specific tax advice regarding expats and foreign obligations. But we do work effectively with your current advisory team to ensure any transactions you make are, in fact, legal and compliant with U.S. tax law.

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