Author Topic: pre tax vs post tax savings for ex-pats  (Read 3093 times)

KCM5

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pre tax vs post tax savings for ex-pats
« on: March 03, 2015, 12:58:10 PM »
How should our consideration of financial savings vehicles change if we're planning on emigrating to a country with a tax treaty with the US? My spouse and I are planning on moving out family to the UK in about 10 years. I don't know if we'll stay there through retirement, but we'll be there at least 5-10 years. We'll be working at least part time while we're there.

Right now we're putting most of our money into a pre tax deferred comp vehicle (457) but are putting a small amount into a Roth IRA. Our AGI, is about $58k right now. We put $18,200 into our 457s (2, so we're not over the limit), $4800 into a Roth IRA, $5000 into a flex spending account for child care, and about $5000 that goes into our mandatory pension scheme. We're in the 15% tax bracket.

We don't plan on touching our Roth IRA or 457 for the first few years after we emigrate but we don't know what country we'll be living in once we do decide to start drawing from them. How do the tax treaties work? If we draw from the 457 while living in Britain we'll owe tax to the US, correct? And we may owe a bit more to the UK government since they in general have higher taxes, is that correct? Anyone know how the UK treats Roth IRA withdrawals? Considering we may be withdrawing money while in the UK would it make more sense to max out Roth IRAs taxed at 15% (mostly, maybe a bit at 25%)?

FLBiker

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Re: pre tax vs post tax savings for ex-pats
« Reply #1 on: March 03, 2015, 03:05:10 PM »
I'm not a tax expert, but I lived and worked in Taiwan and China (I'm a US citizen) for most of my 20s.  The way it worked for me was that I had a certain amount (I think it was ~$85K) that I could earn before I had to pay any US income tax, provided I lived outside the US for more than 50% of the year.  The form I used was 2555, and it looks like the limit has risen to over $99K (http://www.irs.gov/instructions/i2555/ch01.html).

I did a Roth IRA for years (while living overseas) because (since I wasn't paying taxes) the Traditional wouldn't help.  Now that I'm back in the US, the Traditional makes more sense.  Plus, with the backdoor Roth pipeline, it seems like the Traditional generally comes out ahead.

I don't know anything about tax treaties, though.

beltim

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Re: pre tax vs post tax savings for ex-pats
« Reply #2 on: March 03, 2015, 03:27:23 PM »
I'm not a tax expert, but I lived and worked in Taiwan and China (I'm a US citizen) for most of my 20s.  The way it worked for me was that I had a certain amount (I think it was ~$85K) that I could earn before I had to pay any US income tax, provided I lived outside the US for more than 50% of the year.  The form I used was 2555, and it looks like the limit has risen to over $99K (http://www.irs.gov/instructions/i2555/ch01.html).

I did a Roth IRA for years (while living overseas) because (since I wasn't paying taxes) the Traditional wouldn't help.  Now that I'm back in the US, the Traditional makes more sense.  Plus, with the backdoor Roth pipeline, it seems like the Traditional generally comes out ahead.

If you excluded all of your income under the Foreign Earned Income Exclusion, you probably weren't eligible to contribute to any US retirement accounts:
http://forum.mrmoneymustache.com/investor-alley/add-to-vtsax-or-start-a-roth-ira-18884/msg320298/#msg320298
http://forum.mrmoneymustache.com/investor-alley/american-abroad-self-employment-and-roth-ira/msg142799/#msg142799

OP:
I know less about your situation that the reverse (i.e. FLBiker's).  But it appears that withdrawals from Roth IRAs are not generally considered tax-free by other countries:
http://thunfinancial.com/iras-roth-iras-and-the-conversion-decision-for-americans-living-abroad/
But this thread:
http://www.expatforum.com/expats/britain-expat-forum-expats-living-uk/50214-paying-uk-tax-roth-ira-withdrawals.html
led me to this:
http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/uktreaty.pdf
specifically, article 17, which suggests a Roth IRA withdrawal wouldn't be taxed.  This is repeated here:
http://www.us.kpmg.com/microsite/tax/ies/tea/summer2004/stories/article01.htm   

KCM5

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Re: pre tax vs post tax savings for ex-pats
« Reply #3 on: March 04, 2015, 07:26:55 AM »
Well, that is some really great research. Thank you!

So it seems like the Roth won't be taxed. And it also seems that any social security and pension income will be taxed in the country we're residing in, regardless of where its earned (with the exception of lump sum payments, which we don't anticipate). The only questionable account is the 457, deferred compensation. I'm going to assume that it will be taxed in our country of residence.

Also, I concur with Beltim about the Roth IRA. If you were between the amount of foreign income exclusion and the Roth income limit you could put money into a Roth, but that's a pretty narrow window.

beltim

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Re: pre tax vs post tax savings for ex-pats
« Reply #4 on: March 04, 2015, 10:26:04 AM »
Well, that is some really great research. Thank you!

So it seems like the Roth won't be taxed. And it also seems that any social security and pension income will be taxed in the country we're residing in, regardless of where its earned (with the exception of lump sum payments, which we don't anticipate). The only questionable account is the 457, deferred compensation. I'm going to assume that it will be taxed in our country of residence.

Also, I concur with Beltim about the Roth IRA. If you were between the amount of foreign income exclusion and the Roth income limit you could put money into a Roth, but that's a pretty narrow window.

No problem!  It's an interesting question.  I would say, though, that tax treaties can vary pretty wildly by country, so I wouldn't assume that how income is treated in one country will have anything to do with how it's treated in another country.

MrMoogle

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Re: pre tax vs post tax savings for ex-pats
« Reply #5 on: March 04, 2015, 02:08:11 PM »
There are lots of possibilities for ex-pats.  I'll tell you mine.

I work overseas for a US company, so they offer a 401k.  My paycheck comes in US dollars but from a foreign source, so I qualify for the FEIE.  I have to pay foreign taxes and my whole income is excluded from US federal (not state) taxes.  So since I have to pay foreign taxes whether I put in traditional or Roth 401k, I max out my Roth 401k. 

I can't do IRA's, since it's all excluded.  But I can do Roth conversions.  I converted my previous 401k into a tIRA.  Now I can convert up to the Standard Deduction + Personal Exemption - profits in my taxable accounts from tIRA to Roth IRA tax free each year. 

You still have to pay state taxes.  So since you're planning this 10 years in advance, try to get residency in a state that doesn't tax income.  This can take up to a year.

FLBiker

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Re: pre tax vs post tax savings for ex-pats
« Reply #6 on: March 04, 2015, 02:32:36 PM »
I'm not a tax expert, but I lived and worked in Taiwan and China (I'm a US citizen) for most of my 20s.  The way it worked for me was that I had a certain amount (I think it was ~$85K) that I could earn before I had to pay any US income tax, provided I lived outside the US for more than 50% of the year.  The form I used was 2555, and it looks like the limit has risen to over $99K (http://www.irs.gov/instructions/i2555/ch01.html).

I did a Roth IRA for years (while living overseas) because (since I wasn't paying taxes) the Traditional wouldn't help.  Now that I'm back in the US, the Traditional makes more sense.  Plus, with the backdoor Roth pipeline, it seems like the Traditional generally comes out ahead.

If you excluded all of your income under the Foreign Earned Income Exclusion, you probably weren't eligible to contribute to any US retirement accounts:
http://forum.mrmoneymustache.com/investor-alley/add-to-vtsax-or-start-a-roth-ira-18884/msg320298/#msg320298
http://forum.mrmoneymustache.com/investor-alley/american-abroad-self-employment-and-roth-ira/msg142799/#msg142799

Interesting.  Whoops. :)

KCM5

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Re: pre tax vs post tax savings for ex-pats
« Reply #7 on: March 04, 2015, 02:56:44 PM »
There are lots of possibilities for ex-pats.  I'll tell you mine.

I work overseas for a US company, so they offer a 401k.  My paycheck comes in US dollars but from a foreign source, so I qualify for the FEIE.  I have to pay foreign taxes and my whole income is excluded from US federal (not state) taxes.  So since I have to pay foreign taxes whether I put in traditional or Roth 401k, I max out my Roth 401k. 

I can't do IRA's, since it's all excluded.  But I can do Roth conversions.  I converted my previous 401k into a tIRA.  Now I can convert up to the Standard Deduction + Personal Exemption - profits in my taxable accounts from tIRA to Roth IRA tax free each year. 

You still have to pay state taxes.  So since you're planning this 10 years in advance, try to get residency in a state that doesn't tax income.  This can take up to a year.

Whoa. So while we're working overseas we can convert money from a tIRA or 457 into a Roth? That's amazing. I like it.

I just checked and since we'll be residents overseas, we won't be subject to state tax once we've established our residency in the UK, which simply requires taking steps to establish residency like opening a bank account, getting a job, drivers license, etc. We're in Iowa. I was thinking about establishing residency in a no tax state because we'll be using money from the deferred comp to travel for 2 years before establishing residency in the UK, but we'll see how we feel about that sort of thing when we're ready to leave. Its not a whole lot of money and may not be worth the hassle. 

MrMoogle

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Re: pre tax vs post tax savings for ex-pats
« Reply #8 on: March 04, 2015, 03:43:16 PM »
There are lots of possibilities for ex-pats.  I'll tell you mine.

I work overseas for a US company, so they offer a 401k.  My paycheck comes in US dollars but from a foreign source, so I qualify for the FEIE.  I have to pay foreign taxes and my whole income is excluded from US federal (not state) taxes.  So since I have to pay foreign taxes whether I put in traditional or Roth 401k, I max out my Roth 401k. 

I can't do IRA's, since it's all excluded.  But I can do Roth conversions.  I converted my previous 401k into a tIRA.  Now I can convert up to the Standard Deduction + Personal Exemption - profits in my taxable accounts from tIRA to Roth IRA tax free each year. 

You still have to pay state taxes.  So since you're planning this 10 years in advance, try to get residency in a state that doesn't tax income.  This can take up to a year.

Whoa. So while we're working overseas we can convert money from a tIRA or 457 into a Roth? That's amazing. I like it.

I just checked and since we'll be residents overseas, we won't be subject to state tax once we've established our residency in the UK, which simply requires taking steps to establish residency like opening a bank account, getting a job, drivers license, etc. We're in Iowa. I was thinking about establishing residency in a no tax state because we'll be using money from the deferred comp to travel for 2 years before establishing residency in the UK, but we'll see how we feel about that sort of thing when we're ready to leave. Its not a whole lot of money and may not be worth the hassle. 

Different countries have different rules, so it's possible the UK could tax the conversion.  I know my country does not, since it never comes inside the country.

My residency is Alabama, so I have to pay state taxes, even if it's earned outside the US.  Lame...

So learn about your state laws and UK's laws.  There are websites for ex-pats living in many countries.