How high-earning expats save US$2,000/year through an IRA deduction many US residents can't take

High-earning US citizens and green card holders living and working in low-tax jurisdictions like Hong Kong or Singapore often send substantial US tax payments back to the US, often annually or quarterly.  While Americans living and working outside the United States can benefit from the foreign earned income exclusion, foreign housing exclusion, and foreign tax credits can reduce these taxes, there is at least one tax savings tool few Americans living abroad have access to: the 401(k).

Some good news: not having access to a 401(k) or other US-qualified tax-deferred savings plan at work (which very few Hong Kong based employers offer) DOES mean you may now be able to fully deduct contributions to a traditional IRA.  As has been, the deadline for contributions is around April 15th of the following year (so you have until around April 15th, 2017 to make an IRA contribution deductible on your 2016 return).  IRA contribution limits for 2016 and 2016 are still only US$5,500/year per employee (US$6,500/year for those aged 50 or older), but for high-income expat professionals in the 33% or higher tax bracket, this is easily a non-negligible savings of US$2,000 per year.  Many highly-paid Americans moving to Hong Kong tend to overlook this, as they were not able to deduct IRA contributions when they had a 401(k) and their incomes are often too high make Roth IRA contributions, but it can be costly to continue overlooking these IRAs after moving here.

To be clear, in order to make eligible deductible, you must have non-excluded earned income – that is, income from your work that has not been excluded by the foreign earned income exclusion, foreign housing exclusion, or some other exclusion.  Generally (but not always), this is the case for individuals earning over US$200,000 +/-.

We help clients contribute to their tax-deferred retirement accounts with greater flexibility and transparency on fees and investment options than most 401(k) and MPF plans, and we also help with 401(k) rollovers and Roth conversions.  While a US$5,500/year IRA contribution to save US$1,800 on your 2016 US taxes may not seem like a lot of money, saving consistently can easily make a million dollar difference or more over time.

Contact us through the contact form below discuss how a GFM-managed IRA plan can work for you.

This post is for discussion purposes only and is not to be considered tax, legal, or investment advice.  Please contact us for personalized investment advice or referral to a trusted tax professional specific to your situation.