A reader on the Mint.com Facebook page writes:
What are the best retirement savings tools for Americans living abroad? I can’t invest in an IRA or 401(k) with foreign-earned income. But I’m young, I have disposable income, and I’d like to get started now.
Good for you.
The reader didn’t specify his job or which country he’s working in, so I’m going to imagine he teaches English to Tokyo hipsters by day and tends bar in the Caribbean at night.
The Foreign Earned Income Exclusion (FEIE)
If you work abroad all year long, you’re eligible for the Foreign Earned Income Exclusion (FEIE). Basically, the IRS figures that if you live and work outside the US, you shouldn’t have to pay taxes on the first $92,900 of your income, plus an additional allowance for housing.
The rationale for this juicy deal is:
- You’ll probably be paying income taxes in the country where you work.
- You won’t be able to take advantage of most of the services paid for by US taxes, anyway.
The only downside to the FEIE is that if you exclude all of your income from U.S. taxes (as your average English teacher/bartender will), you can’t contribute to a traditional or Roth IRA or 401(k), all of which require non-excluded earned income.
Furthermore, U.S. citizens who participate in a retirement plan in another country are likely to end up with ongoing tax headaches.
So we’re back to the original question: what should our international playboy do?
Save like an international man (or woman) of mystery
The best move for a U.S. citizen working abroad who intends to return to the U.S. is to open a taxable brokerage account with a U.S.-based brokerage or mutual fund company. “Taxable account” just means “not an IRA.” You can still use the money for retirement, of course, even though it’s not in an officially designated retirement account.
This, unfortunately, is easier said than done. If you’re a foreign resident and aren’t rolling in cash, most US brokerages will consider you high-maintenance — at best. Vanguard doesn’t want your money at all. Schwab makes a special effort to reach non-U.S. residents, but they have a minimum opening balance of $25,000.
TD Ameritrade is open to residents of most, but not all, countries and they don’t require any special procedures or minimum balances. Roughly 30 to 40 countries are on a blacklist, however, and TD doesn’t publish it; you just have to ask. And we’re not necessarily talking about Axis of Evil-type countries; I was able to determine that Japan is on the blacklist.
Now, I am not explicitly suggesting anyone do this, but I suspect the way most foreign residents get around these restrictions is to link their brokerage account to a U.S. bank account (which they established before leaving the US), provide a U.S. mailing address to the brokerage, and sign up for online statements.
However you manage to establish an account, whatever investments you would have made in your IRA, you can make in your taxable account, with no maximum contribution. Those investments might include mutual funds, ETFs, or individual stocks and bonds.
The interest, dividends, and capital gains from those investments are not considered earned income and will be taxable, but because you’ll be in a low tax bracket, the taxes will be minimal, at least until you have a very large investment account.
This leaves the question of how to get the money to the U.S. and into U.S. dollars without spending a fortune on wire transfer and currency conversion fees.
If you work with a brokerage used to dealing with international residents, they can probably help by providing an international bank account where you wire the money and it automatically ends up in your U.S. brokerage account within a couple of days. (Schwab offers this service; TD Ameritrade doesn’t.) Or, if you need to get money into your US checking account as an intermediate step, you can use a low-cost international wire service like XE.net or OANDA.
Trouble in paradise
I’ve glossed over a variety of other issues you may run into. Border straddling of any kind makes governments nervous, especially when money is involved. It’s hard not to get the feeling that everyone assumes you’re a smuggler or a wealthy elite trying to pay zero taxes.
- The IRS is not the only taxman in the world. The country you live and work in may want to know why you’re keeping all this money “offshore,” and might want a cut. This is more likely to come into play when you’ve amassed enough money to be worth going after—but I’m not promising anything. The details vary from country to country.
- Speaking of the IRS: they are generally intolerant of U.S. citizens investing in foreign mutual funds and similar investments. Unless you want to learn a whole lot about “passive foreign investment companies” and all the red tape involved, avoid investing in funds local to your host country, even if they’re denominated in U.S. dollars.
- The U.S. Treasury (not the IRS this time!) wants to know about your foreign accounts (bank, brokerage, or otherwise). If the total balance exceeds $10,000, then you have to file an annual form with Uncle Sam.
The best advice I can give is: talk to members of your expat community. Admittedly, if we’re talking about 24-year-olds teaching English in Japan, they’re probably not sending any money home or putting anything away for retirement. Fine. Seek out ”the suits” in your expat community and hire a pro to do your taxes the first year or two, or until you understand how all the moving parts work.
None of these hurdles are legitimate excuses for failing to save for retirement—and I know the reader knows that, or he wouldn’t have asked.
Oh, and if you think this sounds like a reeking can of worms, it could be worse: you could be a non-citizen working in the U.S., trying to abide by our rules. More on that in a few weeks.
Do you have an investing question for Matthew Amster-Burton? Head over to the Mint.com Facebook page and ask away!