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This year I will be qualifying for the FEIE. All of my income will be excluded so effectively I will have $0 taxable income. I am participating in my employer Simple IRA plan because of the employer match. I want to put more into my retirement accounts. I was told during an offhand conversation with an accountant that if I qualify for the FEIE I can't contribute to a Roth, but I could contribute to a non-deductible Traditional IRA. Is this the case? Are there any disadvantages to maxing out my retirement funds while I qualify for the FEIE? If I can't contribute directly to a Roth, I'd like to do a non-deductible Trad and then convert it to a Roth at the end of the year. Then I'd just have to pay taxes on the gains for the year.

I read some IRS docs (Individual Retirement Accounts among others) and I'm confused as to whether I'd qualify. If it makes a difference, I'm being paid by a US company so I'm paying SS and Medicare taxes though I'm no longer paying Federal or State.

I appreciate any feedback.
 

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I was told during an offhand conversation with an accountant that if I qualify for the FEIE I can't contribute to a Roth, but I could contribute to a non-deductible Traditional IRA. Is this the case?
No. Since all your earned income will be excluded using the Foreign Earned Income Exclusion (and perhaps Foreign Housing Exclusion), you have no remaining taxable (but not necessarily taxed) earned income. Thus you cannot make an IRA contribution.

Your next question seems to be mooted by that answer.

If this concerns you, one option to explore, particularly if you live in a comparatively high income tax jurisdiction (and will owe foreign income tax), is to skip the Foreign Earned Income Exclusion (and Foreign Housing Exclusion) entirely and take only the Foreign Tax Credit. Then you would have taxable earned income and could make an IRA contribution if you otherwise qualify.

If you qualify for the Foreign Earned Income Exclusion for only a partial year, the part of the year when you had U.S. taxable earned income counts, and you could make an IRA contribution from that portion of your income if you otherwise qualify. The same thing is true at the end of your overseas stint, in the tax year when you would have some FEIE-excluded earned income and some non-excluded earned income. So, for example, if you have a two year assignment spanning June, 2015, to May, 2017, you'd likely be able to make IRA contributions for 2015 and 2017 but not 2016 if you take the Foreign Earned Income Exclusion across all the income that qualifies.

My understanding is that you can still make contributions to a 529 College Savings Plan, even if you take the Foreign Earned Income Exclusion, if that interests you. (Though I'd recommend only a low-cost 529 plan. The Vanguard/Nevada 529 looks pretty good, and I also like Ohio's Direct 529, also solely in Vanguard funds.) Those are other U.S. tax-advantaged accounts for different purposes. However, note that, absent a tax treaty that says otherwise, U.S. tax advantages do not matter in the foreign country where you work, where you may have income tax to pay even on U.S. tax-advantaged accounts like 529s and IRAs. (It depends on the country.)
 

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Discussion Starter #3
Thanks. I am a digital nomad so I don't stay in one spot long enough to establish residency and therefore be required to pay foreign taxes so I can't use the FTC. So, this raises another question - should I not be contributing to my company's IRA? At this point I am only contributing 3% to get the maximum company match. I'd like to get the free 3% but not if it's going to come back and bite me in the butt in the long run.

Thanks for your help!
 

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Thanks. I am a digital nomad so I don't stay in one spot long enough to establish residency and therefore be required to pay foreign taxes so I can't use the FTC.
Be careful about that. It depends on the country and their rules (both immigration and tax), bearing in mind that the length of the wire (or wireless connection) between you and your client is immaterial to most countries. Work is performed where you are. The Internet didn't change that. A telegraph operator working in London in 1890 sending financial data to Wall Street wasn't working in New York. Digital nomads predate most personal income tax codes, in fact.

There are a few countries on the planet where, if you step foot in them and then work for any length of time, you legally owe tax on that share of income. Even as a non-resident. New York State is one of those strange places. Not a country, but the New York State income tax code is very broad and frequently applies if you step foot in New York State with any business activity, Internet or not. (I just happen to know about that one because occasionally I owe some New York State income tax when I'm on a business trip there.)

So, this raises another question - should I not be contributing to my company's IRA?
Good question! I looked into that question a bit before I wrote my first reply, and it appears SIMPLE IRAs are OK. Which makes sense because 401(k)s are OK, too, and they're analogous. But please double check my understanding.

At this point I am only contributing 3% to get the maximum company match. I'd like to get the free 3% but not if it's going to come back and bite me in the butt in the long run.
Check IRS Publication 560, but I think you (and your employer) are OK from what I can tell.

Considering that you're (apparently) no longer going to be able to contribute to a Traditional or Roth IRA, and assuming the SIMPLE IRA is still OK, you might want to consider increasing your 3% withholding from your payroll deduction. I'm assuming your employer's SIMPLE IRA is a good one, offering low-cost index funds for example (like Vanguard's).

The next topic I'm going to mention is a bit esoteric and speculative, but what the heck. ;)

If you're so fortunate to earn above the Foreign Earned Income Exclusion (and Foreign Housing Exclusion) in the future, there is something called a "Backdoor Roth IRA" potentially available. The way it works is that you'd contribute to a non-deductible Traditional IRA then roll that Traditional IRA over into a Roth IRA....

....Except that probably isn't going to work unless your SIMPLE IRA is also Roth. When you roll over a Traditional IRA into a Roth IRA the rollover is pro-rated across all your IRA holdings, including (as I recall, but please check this if it's relevant) the SIMPLE IRA (non-Roth). And that doesn't work so well because you'd then pay some tax on the gains on that SIMPLE IRA.

I suspect your accountant had that "Backdoor" idea in mind, but unfortunately it doesn't apply to you for (probably) two reasons. Nonetheless, you've apparently got a viable SIMPLE IRA at work, so just boost your contributions into that if you are interested in contributing to an IRA. That still works, apparently.
 

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As a follow-up, another approach is to spend some time in the United States each year. Here's roughly how that would work.

Let's assume you're earning $5000 per month ($60000 per year). You spend exactly 11 months of the year as a tax-and-immigration-legal nomad outside the United States. That means you spend 330 days or more per year outside the United States, so you pass the Foreign Earned Income Exclusion's physical presence test. (Nomads cannot pass the bona fide residence test.) However, for one month you work in, say, Alaska. (Alaska has no state income tax, so it's a simpler example.) Thus you have $5000 in U.S. source earned income and $55000 in foreign earned income.

But that also means you can contribute up to $5000 to an IRA if you otherwise qualify, because the $5000 is not part of your Foreign Earned Income Exclusion (or at the very least need not be). That also means the $5000 is potentially subject to U.S. income tax, but maybe not -- you'd just have to run a tax calculation simulation.

A few people do exactly what I've just described, particularly very high income people. In some extreme cases they can just work one day in the United States, qualify to make their "Backdoor" IRA contribution (and U.S. Social Security contribution, to keep their disability coverage going and boost their future retirement benefits), then head to Dubai for the year. ;) And all that at least seems to be perfectly legal.

....Or just boost your SIMPLE IRA contributions. That evidently works, too.
 

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Discussion Starter #6
Cool, thanks. I will do some additional DYDD about the Simple to confirm. I actually hate that our Simple IRA is with an insurance company and not Vanguard or similar (I'm a former Vanguard employee so I'm biased :)) but I harassed our plan admin enough to discover that there are a set of no loads that I can purchase so I won't incur the ridiculous $30/transaction fee. So, I will just up that contribution since it seems to be my only tax advantaged retirement option at this point and then I'll start a standard investment account to take advantage of the long-term cap gains.

Re the taxes: yeah, I travel on tourist visas and generally only go to countries who aren't strict about it.
 

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So, I couldn't find a good definitive response to the Simple IRA question, so instead I created a fake account on Turbo Tax and filled it in using what my W2 numbers will (approximately) be for 2015. I got the all clear on the Simple IRA contributions so yay. Just a tip in case someone else was curious and would find a dry run helpful. :)
 

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.... I harassed our plan admin enough to discover that there are a set of no loads that I can purchase so I won't incur the ridiculous $30/transaction fee. So, I will just up that contribution since it seems to be my only tax advantaged retirement option at this point and then I'll start a standard investment account to take advantage of the long-term cap gains.
Or you could open a 529 if you have or expect to have a child who could use some funds for higher education. Or a nephew, niece, etc. If you need an honorary niece, I'm sure I could find a volunteer beneficiary. ;)

Obviously as a former Vanguard employee you'd know that there's both the transaction fee and the ongoing fund expenses to worry about, but I mention that for the benefit of other readers. When you leave that employer in the future you should be able to roll over the SIMPLE IRA into your own individual IRA without U.S. tax consequences, whereupon you can redirect the investments as you wish. (You'd also have the option to roll it over into a Roth at that point if it made sense, though with tax consequences at that point.)

If your employer's SIMPLE IRA has a Roth option, that'd be pretty cool. (I don't know if SIMPLEs can offer that option or not. A 401k plan can.) That'd mean you'd be contributing after-tax income, but that income would not be subject to U.S. tax thanks to the Foreign Earned Income Exclusion. Can't beat that!

Re the taxes: yeah, I travel on tourist visas and generally only go to countries who aren't strict about it.
I recommend upgrading that word "generally" to "always."
 

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Discussion Starter #9
I wish there was a Roth option. I might have to bring that up to my boss. :) Yes, ERs are important and I always stay below 1% and usually below .5%, depending on the fund.

If I'm still living abroad when I leave this job I will have to look into rolling it into a Roth given that my tax rate will pretty much be 0 with the FEIE. I will cross that bridge when I come to it. For now, I will just up my contributions and start maxing it out.

Thanks for your help
 

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One "catch" with a Roth is that the U.S. tax advantages of Roths are less often protected outside the United States. If your intention is to retire outside the United States, probably some mix of Traditional and Roth IRAs is a good bet. And that's quite possible to do because you can do partial IRA rollovers into Roths, if it makes sense. (It may or may not.)
 

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So, I couldn't find a good definitive response to the Simple IRA question, so instead I created a fake account on Turbo Tax and filled it in using what my W2 numbers will (approximately) be for 2015. I got the all clear on the Simple IRA contributions so yay. Just a tip in case someone else was curious and would find a dry run helpful. :)
Be a little bit careful in relying on TurboTax (or any tax preparation software) to determine how to handle a long-term option like an IRA or 401K. The rules can and do change from year to year and may be subject to interpretation.
Cheers,
Bev
 
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