Key Takeaways
- Americans living abroad face unique financial and tax challenges when both contributing to and receiving distributions from an individual retirement account (IRA).
- Before moving overseas, it’s important to understand common traditional IRA and Roth IRA challenges and potential solutions.
Ensuring adequate retirement savings is essential for everyone, including Americans living abroad. However, U.S. expats face unique challenges when participating in — and receiving withdrawals and distributions from — both traditional and Roth IRAs. Here, we highlight potential expat IRA challenges and offer tips to help you maximize your retirement savings while living abroad. If you’re just getting started, it can also be helpful to review a broader overview of how IRAs and Roth IRAs work for U.S. expats before making changes to your accounts.
The Foreign Earned Income Exclusion (FEIE) Challenge
In order to make an IRA contribution, you must have earned income, which typically isn’t a challenge for Americans living stateside. However, if you’re living abroad and using the foreign earned income exclusion, you may not qualify, as excluded foreign earned income isn’t recognized by the IRS as taxable compensation for IRA purposes.
If your earned income exceeds the FEIE limit ($130,000 in 2025 and $132,900 in 2026), you may be eligible to contribute to a traditional IRA or Roth IRA based on your excess earned income. However, you probably wouldn’t be eligible to claim a U.S. tax deduction for your traditional IRA contribution if you had already claimed an exemption for the remainder of your income.
A Potential solution
One potential solution to the FEIE challenge is to use the foreign tax credit instead of the earned income exclusion. Doing so helps ensure your income is recognized by the IRS for the purposes of IRA and Roth IRA contribution eligibility while still providing a U.S. tax benefit. This can also be a smart strategy if you live in a country with high tax rates, as the credit can be used to offset your U.S. tax liabilities on foreign income.
The Double Taxation Challenge
Contributions to Roth IRAs are made with after-tax income, which can be a great benefit for Americans living stateside, as the assets can be withdrawn tax-free in retirement under U.S. rules. However, not all foreign countries recognize the tax-exempt status of Roth IRA distributions, and some may treat Roth accounts as regular investment or retirement accounts for local tax purposes. If your country of residence doesn’t maintain a double taxation treaty with the United States that addresses Roth IRAs, you may face double taxation on any Roth assets you withdraw while living overseas.
A Potential solution
Potential solutions to the Roth double taxation challenge are complex, and the best approach depends on your particular financial situation, future goals, current country of residence, other tax liabilities and more. For some Americans, it makes sense to make Roth IRA withdrawals before moving overseas. However, the downside to this approach is that while the assetscan still be invested for future growth, they’ll need to be managed tax efficiently as they’ll no longer enjoy tax-deferred growth.
Before withdrawing from a Roth IRA as a U.S. expat, be sure to consult with a qualified international wealth manager who can help navigate your current country’s tax laws and implement a strategy to help minimize your tax exposure.
The Account Access Challenge
Many U.S. financial institutions and brokerage firms no longer work with U.S. expats due to complex reporting, compliance and regulatory requirements related to foreign accounts and residency status. In certain situations, you may even face account closure if your IRA is held at an institution not friendly to foreign residents, sometimes with tight deadlines to move your account.
However, it’s typically wise to maintain your U.S.-based IRA accounts and other retirement accounts while living abroad for two main reasons:
- You can continue to access U.S. markets, which are among the largest and most liquid in the world.
- You can avoid multiple reporting requirements and potential tax pitfalls that can be triggered by overseas investment or retirement accounts, including FBAR filing in some circumstances.
A potential solution
While many U.S. banks and brokerage firms don’t work directly with individual non-U.S. residents, a handful will work with U.S.-based financial advisory firms acting on behalf of clients. At Creative Planning International, we have relationships with several large brokerage firms and can help you open and maintain a U.S.-based investment account to hold your IRA assets while you’re living abroad.
The Investment Restriction Challenge
One of the most common and significant investing mistakes made by U.S. expats is purchasing shares of a foreign mutual fund inside a taxable or retirement account. The U.S. tax code categorizes many non-U.S. registered mutual funds as passive foreign investment companies (PFICs), and these investments are taxed very punitively by the United States and require additional IRS forms. In addition, each PFIC must be reported annually on U.S. Tax Form 8621, which requires complex accounting and is very time consuming to complete.
A potential solution
Whether within or outside your IRA, it’s important to avoid PFICs entirely in your investment and retirement strategy, as they can erode the tax benefits of an IRA or other retirement plan. Because foreign brokerages rarely offer U.S.-domiciled funds, it can be very easy to inadvertently invest in an PFIC in an overseas account as an American expat. The best way to avoid these funds is to continue investing through a U.S.-based investment account and work with an advisor familiar with PFIC rules and broader expat retirement planning considerations.
