Retirement planning for US citizens typically revolves around 401(k)s, Traditional IRAs, Roth IRAs, and other variants. This blog post explores how to manage these accounts while living abroad.
Basics
Firstly, you can retain all your retirement accounts, as most brokers will continue to support them even if you reside overseas. It’s generally advisable to roll over all your 401(k) accounts into a Traditional IRA, so this discussion will focus primarily on Traditional IRAs.
You will have full control over your funds, enabling you to perform trades, rebalance your portfolio, and manage your investments as you see fit. The primary considerations are whether you can continue contributing to these accounts and what happens when you withdraw funds upon reaching retirement age.
Traditional IRA
To contribute to a Traditional IRA, you must have earned income, which will likely be taxed in your country of residence, negating the tax-advantaged purpose of the IRA.
Consequently, contributing to a Traditional IRA while living abroad is feasible or worthwhile only in limited situations.
Withdrawals, however, are relatively straightforward. Distributions will be taxed as income in your country of residence.
Roth IRA
Contributing to a Roth IRA is dependent on your income. If you claim the Foreign Earned Income Exclusion (FEIE), that income is excluded from the Roth IRA calculation.
If your earnings are below the FEIE threshold, you might avoid the FEIE and claim only the Foreign Tax Credit (FTC). This can be advantageous if the taxes paid in the foreign country offset your US tax liability.
Thus, a Roth IRA can remain a viable option even while living abroad. However, withdrawals are more complex because the tax-free status of Roth IRAs is not usually recognized by foreign countries, meaning you may be subject to income taxes on distributions.
This situation is less than ideal, considering you’ve already paid taxes at the contribution stage. However, international treaties often recognize retirement accounts across borders, making this a somewhat gray area.
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