What Should You Do with Your Roth IRA When Moving Abroad?

While you might be spending the next few years in another country – or even the rest of your life – it is still important to plan for retirement.  Many people use IRAs because they are a unique, well-structured way to save money and leverage tax-free growth.  But if your Roth IRA is a U.S. account and you are moving abroad, is there anything you need to do?  Does this affect your account in any way?

Usually, Americans living abroad will still pay U.S. taxes and can still hold U.S. accounts, including their IRA.  This usually means you will not need to move your IRA with you.  Moving your Roth IRA abroad might incur a lot of penalties, but you should instead be able to leave it where it is and use it just as you would while living in the U.S.  However, some tax credits for Americans living abroad might drive your income down so low that you can no longer make contributions.

Call our tax CPAs for expats today at US Tax Help for assistance with your taxes and IRA contributions by dialing (541) 362-9127.

Do I Need to Do Anything to Contribute to My Roth IRA While Living Abroad?

Contributing to a Roth IRA is a great way to save money for retirement.  With a Roth IRA, you get the benefit of paying taxes now – ideally when you are in a lower tax bracket than you will be at retirement – and then drawing on tax-free growth after your account has grown over the years.  If you live abroad, there are a few complications on how to contribute to your IRA, but you can plan for these with the help of a tax accountant for expats.

First, in order to contribute to a Roth IRA at all, you need to meet certain income requirements.  These requirements look at your taxable income – that is, income taxable by the U.S. government.  Many people living abroad take advantage of the Foreign Earned Income Exclusion and the Foreign Housing Deduction, both of which can shrink their final income amounts potentially to $0.  If that happens, then you have no “income” that qualifies you to contribute to an IRA, and you cannot contribute anything.

If you forego these deductions, you might still be able to contribute to your IRA, but you might face higher taxes because that will push you back up into taxable income and a higher tax bracket.  That also means you will be paying higher taxes on your contributions to your IRA.

Taking the Foreign Tax Credit instead, if you can, might end up taking less out of your taxable income so that you can end up with taxable income at the end of the day, allowing you to contribute to your IRA.  In any case, it is worth having a tax accountant review your situation so that you know how much you can contribute and what if any steps you need to take to allow yourself to contribute to your Roth IRA while living abroad.

Do I Need to Do Anything to Draw on My Roth IRA While Living Abroad?

Whether you live in the U.S. or abroad, the rules for drawing on your IRA should be the same.  With Roth IRAs, you can only draw funds early for certain reasons, such as purchasing your first home, paying for education, or paying for healthcare.  If you have reached close to retirement age, you may qualify to start drawing on your Roth IRA without taxes or other penalties.  If you do not meet these qualifications and account age requirements, you can face taxes and penalties.  There are some situations where you do not need to worry about penalties, but taxes might still apply if you do not wait long enough to draw on your funds.

However, living abroad does not create many additional hurdles for withdrawing, other than the cost of converting and/or transferring currency abroad.  Keep in mind that if you do draw on funds in your IRA and put them into a foreign account, you will also have to follow foreign account reporting requirements for that foreign account, such as filing an FBAR.  If you already have accounts abroad, you might already be familiar with these requirements.

Should I Move My IRA to a Foreign Account if I’m Moving to Another Country?

If you are moving abroad, you might think you need to bring your accounts with you and put your funds into an account in that foreign country.  With a Roth IRA, this is not usually necessary, especially if you plan to move back to the U.S. before retirement.

If you move your account abroad and it has over $10,000 in it after the transfer, you will have to complete an FBAR and report your foreign account to the IRS.  You will have to do this the first year you move it and every year after that as long as it has a balance of at least $10,000 in it.  This is an extra hassle that you do not need to worry about if your account stays in the U.S.

The other major problem with trying to take out the funds from your Roth IRA and move them into another account is that you cannot usually roll over your funds without a penalty.  Account rollovers are special ways of transferring funds from retirement accounts that put all of the funds into another account or consolidate multiple accounts without incurring penalties for withdrawing funds early.  Rollovers are only available when putting a domestic account into another domestic account – usually another IRA.  So if you try to bring your Roth IRA abroad with you, it will not usually count as a rollover.

This means that you will face whatever penalties you would normally face in the U.S. for early withdrawals or distributions.  With Roth IRAs, you already paid taxes on the money you put into the account, and any growth in the account will be tax-free – but only if you wait to withdraw it.  If you withdraw it early, you can face taxes again as well as a penalty on the withdrawals unless you follow certain rules.

Call Our Tax Accountants for Expats Today

For help determining what to do with your accounts and your taxes when living abroad, get in touch with US Tax Help today at (541) 362-9127.