Key Takeaways
- Contributing to an IRA is one of the most common ways for U.S. citizens to save for retirement; however, some Americans living abroad are ineligible to participate.
- As a U.S. expat, your eligibility to contribute to an IRA may depend on whether you utilize the foreign earned income exclusion (FEIE) or the foreign tax credit (FTC) when filing your U.S. tax return.
One of the most popular and effective ways to save for retirement as a U.S. citizen is by contributing to an IRA. While living stateside, the main eligibility requirement for contributing to a traditional IRA is having a source of earned income. However, contributing to an IRA isn’t as straightforward if you’re an American expat with foreign-earned income.
In fact, your eligibility may depend on whether you use the foreign earned income exclusion (FEIE) or the foreign tax credit (FTC) when you file your U.S. tax return. Here’s what you need to know about how these two tax elections impact your retirement savings.
Can U.S. Expats Contribute to an IRA?
The short answer is yes — but with conditions. To contribute to an individual retirement account (IRA), the IRS requires you to have taxable earned income. For expats, the method you choose to report your foreign income determines whether you meet this requirement.
How the Foreign Earned Income Exclusion Can Restrict IRA Contributions
The FEIE is a tax benefit that allows qualifying U.S. expats to exclude a significant portion of their foreign earnings from U.S. income tax. While this can lower your tax bill, it can also eliminate your ability to save for retirement.
It’s important to note that if you use the FEIE, any of your non-excluded income — earnings above the exclusion limit or other U.S. taxable income — is taxed at the higher rate that would have applied to your total income had you not claimed the exclusion. This “stacking rule” can push your taxable excess income into a higher bracket and is a crucial factor to compare when weighing the benefits of the FEIE versus the FTC. For expats whose income significantly exceeds the exclusion limit, this can sometimes make the FTC approach more advantageous overall.
Why excluding income may make you ineligible
U.S. expats may be ineligible to contribute to an IRA if they use the foreign earned income exclusion and all their earned income is excluded from U.S. taxable earned income.
Because you must have earned income to make an IRA contribution, excluding 100% of your earnings means you technically have $0 earned income in the eyes of the IRS. Without taxable compensation, you are legally barred from contributing to a traditional or Roth IRA for that tax year.
Income in Excess of the FEIE Limit May Qualify
If your foreign earned income is more than the FEIE limit of $130,000 (2025), your excess earned income may allow you to qualify to contribute to an IRA.
For example, if you earn $150,000 and exclude the first $130,000, you still have $20,000 of taxable earned income remaining. This remaining amount can be used to support an IRA contribution. However, keep in mind you generally won’t be eligible for a U.S. tax deduction for your traditional IRA contributions, as the FEIE allows you to claim an exemption for the remainder of your income.
Using the Foreign Tax Credit to Maintain IRA Eligibility
For many expats, the alternative to the FEIE is the foreign tax credit.
Using the foreign tax credit instead of the FEIE typically preserves your eligibility to make IRA contributions.
In contrast to the FEIE, using the FTC doesn’t exclude your U.S. income from IRA eligibility. When claiming the FTC, your foreign earned income is still considered taxable earned income by the United States. The FTC simply provides a dollar-for-dollar credit against your U.S. tax liability based on the foreign income taxes you have already paid to your host country.
Because the IRS still views your income as taxable compensation, you retain your eligibility to make IRA contributions, allowing you to claim a tax benefit while also saving for retirement.
Key Factors to Consider When Choosing Between the FEIE and FTC
Deciding between these two methods is complex. Beyond IRA eligibility, here are other critical factors to consider.
The FTC isn’t available for U.S.-sourced income
Even if you live abroad, the foreign tax credit generally can’t be applied to offset taxes on U.S.-sourced income. It’s strictly for taxes paid on foreign-sourced income.
The five-year lock-in rule
Switching from the FEIE to the FTC comes with a five-year restriction, making the initial choice a critical one for your retirement strategy.
If you elect to use the FEIE and then decide later to revoke it in favor of the FTC (perhaps to make IRA contributions), you’re generally barred from using the FEIE again for five years. This “lock-in” period applies even if the FEIE becomes more beneficial for you in future tax years.
Income phase-outs still apply to Roth IRA contributions
U.S. expats are subject to the same modified adjusted gross income (MAGI) limits on Roth IRA contributions as U.S. residents:
- Single taxpayers – Phased out starting at $150,000; ineligible above $165,000 (2025)
- Married filing jointly – Phased out starting at $236,000; ineligible above $246,000 (2025)
If you use the FTC, your MAGI will likely be higher (as you aren’t excluding income), which could push you over these limits.
Tax deductions and credits aren’t available for foreign investments
U.S. taxpayers can’t claim the FTC or a deduction for taxes paid on foreign investments held within a U.S. tax-advantaged retirement account, such as an IRA. This deduction limitation is one reason why asset location, or which account types hold which investments, is important to consider.
Tax treaties matter
If your current country of residence maintains a tax treaty with the United States, you’ll need to understand its specific provisions before deciding between the FEIE or the FTC. Your ability to contribute to an IRA is just one of many factors to consider.
How Creative Planning International Can Help
Just because you can make IRA contributions doesn’t mean you should. Before contributing to an IRA as a U.S. expat, make sure you understand how those contributions and subsequent distributions are reported in your local country. If you’re not careful, you could face double taxation on retirement distributions.
The decision of whether to use the FEIE or the FTC is a complex one that depends on many factors. At Creative Planning International, our qualified international wealth managers support clients in navigating the financial complexities of life as a U.S. expat. We can help you decide on the best approach based on your personal financial situation, future goals, country of residence and other tax considerations.
