[ Offshore Tax ] Let’s Talk About Roth IRA Contributions for Couples Using FEIE

The Backdoor Roth IRA is a strategy that high earners use to convert a traditional IRA into a Roth IRA. This strategy allows them to make contributions to an IRA, roll it over to a Roth IRA, or convert the entire IRA to a Roth.
The Backdoor Roth IRA strategy is a legal method to circumvent the income limits that typically prevent high earners from owning Roth IRAs.
This strategy is not a tax dodge. While establishing a Backdoor Roth IRA may incur higher taxes initially, it offers the future tax savings associated with a Roth account.
Moreover, the Backdoor Roth IRA strategy can be advantageous for individuals who anticipate having leftover funds in their traditional IRA. They can transfer these funds to their heirs through a Roth IRA.

TIMESTAMPS:
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1:00 Roth IRA Contributions for Couples Using FEIE
2:00 Funding IRA and convert to ROTH
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Let’s Talk About Roth IRA Contributions for Couples Using FEIE

When it comes to taxes, no one wants to pay more than necessary. Luckily, there are certain strategies that can help individuals and couples reduce their tax liability legally. One strategy that couples living abroad can utilize is the Foreign Earned Income Exclusion (FEIE). By taking advantage of this exclusion, couples can minimize their taxable income. But what does this mean for Roth IRA contributions?

First, it’s important to understand what the FEIE entails. The FEIE allows US citizens and resident aliens who live and work abroad to exclude a certain amount of their foreign earned income from US tax. For the tax year 2021, the maximum exclusion is $108,700 per qualifying individual. It is worth mentioning that the FEIE only applies to earned income, not to investment income such as dividends, interest, or capital gains.

Now, let’s delve into Roth IRA contributions. A Roth IRA is a retirement account that offers tax-free growth and tax-free withdrawals. However, there are income limitations when it comes to making contributions. For 2021, if you are married filing jointly, your ability to contribute to a Roth IRA phases out when your modified adjusted gross income (MAGI) reaches $198,000 and is completely eliminated when it exceeds $208,000.

Here’s where the FEIE intersects with Roth IRA contributions. While the FEIE can significantly reduce your taxable income, it does not reduce your MAGI. This means that even if your foreign earned income is excluded from taxation, it is still considered when determining your eligibility to contribute to a Roth IRA. This can be disheartening for couples using the FEIE, as it appears that they are unable to contribute to a Roth IRA due to their high MAGI.

However, there is a potential workaround for couples in this situation. The foreign housing deduction or exclusion can be added back to your MAGI in order to determine your eligibility for Roth IRA contributions. The foreign housing deduction or exclusion allows taxpayers to exclude or deduct certain housing expenses incurred while living abroad. By adding back this deduction or exclusion to your income, you can effectively lower your MAGI, allowing you to contribute to a Roth IRA even if you are using the FEIE.

It’s important to note that this strategy is not widely known, and it is always recommended to consult with a tax professional or financial advisor before implementing it. They can guide you through the complexities of tax laws and ensure that you are making the most advantageous decisions for your financial future.

In conclusion, the FEIE is a valuable tool for reducing taxable income for couples living abroad. However, it does not automatically exempt you from Roth IRA contribution limitations based on MAGI. By considering the foreign housing deduction or exclusion, couples can potentially lower their MAGI and still be eligible to contribute to a Roth IRA. If you are a couple utilizing the FEIE, don’t miss out on the opportunity to grow your wealth and secure your retirement by exploring this strategy further.