Roth IRAs for Americans Living Abroad

Why Roth IRAs Are Relevant for Americans Living Overseas

Roth IRAs offer features that may appeal to individuals navigating multiple tax regimes or planning retirement across jurisdictions. Under current U.S. law:

• qualified withdrawals are not taxed by the U.S.
• Roth IRAs are not subject to Required Minimum Distributions (RMDs) for the original owner.
• Holdings are U.S.-domiciled, which may simplify tax reporting.
• Contributions (if eligible) and conversions follow clear IRS rules, regardless of where the account holder resides.

These features create potential planning benefits, but outcomes vary depending on:

• Whether the individual can contribute based on income and FEIE/FTC usage.
• Whether the individual’s country of residence taxes Roth conversions or withdrawals.
• Future residency changes that may affect tax treatment.
• The individual’s long-term income needs and multi-currency planning.

Roth IRAs do not automatically provide advantages for all U.S. expats.
Their role must be evaluated within the broader cross-border context.

Can Americans Living Abroad Contribute to a Roth IRA?

Roth IRA contributions (not conversions) require meeting three IRS criteria:

1. You must have U.S.-taxable earned income

Earned income may include:

• U.S. wages,
• Foreign wages not excluded under the Foreign Earned Income Exclusion (FEIE),
• Self-employment income if the individual elects the Foreign Tax Credit (FTC) instead of FEIE.

Income excluded under FEIE is not considered eligible compensation for contribution purposes.

Many U.S. expats rely on FEIE, which may remove all earned income from U.S. taxable income. In these situations, Roth IRA contributions are typically not permitted.

2. Modified Adjusted Gross Income (MAGI) must fall within IRS thresholds

The IRS imposes income limits for direct Roth contributions.
These thresholds:

• change annually,
• vary by filing status,
• require checking official IRS publications each year.

Because foreign income, foreign tax credit interactions, and currency conversions can complicate MAGI calculations, contribution eligibility often depends on professional tax guidance.

3. Income must qualify as “earned income” under IRS rules

The following do not count as earned income for purposes of Roth IRA contributions:

• dividends
• rental income
• interest
• pension income
• capital gains
• passive income

These rules create significant limitations for individuals who:

• are retired abroad,
• receive only investment or business income,
• rely on rental or portfolio income,
• receive foreign pension benefits.

Why Many U.S. Expats Cannot Contribute (But Can Still Convert)

Due to FEIE and foreign income patterns:

• a large percentage of U.S. expats do not meet Roth contribution eligibility,
• but they may still carry out Roth conversions.

This distinction is crucial.

Even individuals with no earned income may be able to convert Traditional IRA or 401(k) assets into a Roth IRA, subject to tax considerations.

This is why conversions often feature prominently in cross-border planning.

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Roth Conversions: A Key Consideration for Americans Abroad

A Roth conversion involves transferring assets from:

• a Traditional IRA,
• a Rollover IRA, or
• a Traditional 401(k)

into a Roth IRA.

The converted amount is treated as taxable income under U.S. rules for that year.

Conversions do not require:

• earned income,
• MAGI thresholds,
• contribution eligibility.

This makes conversions accessible to many U.S. expats who cannot contribute directly.

Potential Reasons Why Individuals Abroad Evaluate Roth Conversions

Roth conversions may be considered for a variety of reasons, depending entirely on personal circumstances. Common factors include:

1. Long-Term Predictability

Under current U.S. rules:

• qualified withdrawals from Roth IRAs are tax-free,
• Roth IRAs are not subject to RMDs for the original owner.

This consistency may help individuals planning across multiple jurisdictions.

2. Control Over Timing

Individuals may choose to convert:

• gradually,
• in lower-income years,
• before repatriation,
• before shifts in residency that could affect taxation.

Timing may influence the suitability of a conversion.

3. Currency Flexibility

Individuals who expect to retire or live in different currency zones may prefer an account with predictable U.S. tax treatment, independent of withdrawal timing.

4. U.S.-Domiciled Structure

Roth IRAs hold U.S.-domiciled assets, which may:

• simplify U.S. tax reporting,
• avoid PFIC classification,
• integrate cleanly with 401(k), IRA, and U.S. brokerage structures.

5. Estate Planning Considerations

Under current U.S. rules:

• Roth IRAs pass to heirs with defined treatment,
• distributions for beneficiaries follow specific rules that may differ from Traditional IRAs.

Local country inheritance rules vary and should be reviewed separately.

Circumstances Where Roth Conversions May Be Less Beneficial

Conversions may be less appropriate when:

• the individual resides in a country that treats conversions as taxable income,
• the individual expects higher income in the conversion year,
• liquidity is insufficient to cover tax implications,
• long-term residency plans may lead to different tax regimes,
• the individual expects to move to a lower-tax environment later.

These considerations are personal and should be evaluated case by case.

How Roth Conversions Work (Step-by-Step)

Below is a general educational overview of how conversions typically occur:

Step 1 - Identify eligible accounts

Common sources include:

• Traditional IRAs
• Rollover IRAs
• Traditional 401(k)s (via rollover process)

Step 2 - Decide the conversion amount

The amount converted becomes U.S.-taxable income for that year.

Individuals may choose to convert:

• a full account,
• partial amounts,
• amounts spread across several years.

Step 3 - Evaluate foreign tax considerations

Some countries may:

• treat conversions as taxable income,
• exempt conversions,
• apply special rules.

Local tax guidance may be helpful.

Step 4 - Move assets into the Roth IRA

Conversions are typically completed via a direct custodian transfer.

Step 5 - Observe Roth IRA holding rules

Converted funds generally need to remain in the account for certain periods to ensure qualified distribution treatment.

Step 6 - Maintain records for U.S. tax filings

Conversions require reporting on U.S. tax returns.

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Country-Level Considerations for Individuals Abroad

Roth suitability depends partly on local tax treatment.

Below are general themes (not tax advice):

1. Lower-Tax or No-Tax Jurisdictions

Examples: UAE, Qatar, Bahrain, certain Asian jurisdictions.
These may allow conversions to be evaluated without significant local tax impact.

2. Moderate-Tax Jurisdictions

Examples: Switzerland, Malaysia.
Outcomes vary based on local tax rules and personal circumstances.

3. Higher-Tax Jurisdictions

Examples: Spain, France, Germany, Italy.
Conversions may be taxed locally; long-term modelling is often appropriate.

Local tax advice is essential for understanding how a specific country treats Roth conversions or withdrawals.

How Roth IRAs Fit Into a Global Cross-Border Plan

A Roth IRA may serve as one component of a broader structure that can include:

• U.S. taxable brokerage accounts
• Traditional IRAs or 401(k)s
• U.S.-domiciled ETF portfolios
• local pension schemes
• multi-currency holdings
• country-specific planning arrangements

The role of a Roth IRA varies significantly depending on:

• tax residency
• expected relocation
• retirement currency
• liquidity needs
• time horizon

Hypothetical Examples

These examples are for educational purposes and do not represent actual clients or outcomes.

Example 1 - Expat in a Lower-Tax Jurisdiction

A mid-career professional living in a country with no local income tax reviews whether converting a portion of a Traditional IRA might fit into long-term planning, depending on future residency and withdrawal expectations.

Example 2 - Individual Relocating to Europe

Someone planning to retire in a treaty country evaluates whether making partial conversions before relocation could simplify future tax coordination.

Example 3 - Globally Mobile Couple

A household that frequently changes residency considers using a Roth IRA as a consistent U.S. retirement account while other assets adapt to local systems.

Practical Checklist for U.S. Expats Considering Roth Strategies

How Skybound Wealth USA Assists U.S. Expats

Skybound Wealth USA provides support with:

• reviewing Roth contribution eligibility
• assessing whether conversions align with long-term goals
• evaluating FEIE vs FTC considerations (educational context only)
• coordinating with foreign tax professionals when appropriate
• analysing PFIC considerations
• identifying U.S.-domiciled investment options
• integrating multi-country retirement considerations
• modelling long-term planning through tools such as MoneyMap

Conflict Disclosure:
Skybound Wealth USA may receive compensation when individuals choose to have assets managed under our advisory programs, including in contexts involving rollovers or conversions. Individuals should consider all options before making any decision.

Next Steps

If you would like to understand whether Roth IRAs or Roth conversions may play a role in your long-term planning while living abroad, you may schedule a discussion with Skybound Wealth USA to review your individual circumstances in more detail.