Author Topic: American Abroad--Self-Employment and Roth IRA?  (Read 6150 times)

nikki

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American Abroad--Self-Employment and Roth IRA?
« on: September 24, 2013, 05:50:52 PM »
Hello everyone! I feel a little scummy re-posting this thread in another category, but I didn't receive any responses before. Perhaps Investor Alley will give me more luck!

Here's my situation: I'm an American living and working in South Korea as an English teacher. This is my second year here, so I've already gone through filing taxes in America and excluding my foreign earned income via form 2555. My question is NOT about my income earned through teaching in Korea.

Instead, I'm completely baffled by how to handle income earned as an independent contractor. I am a webcam model and will receive a 1099 form. I understand that I will have to pay self-employment taxes in the US despite living and working in South Korea. But I also see some information that states I can exclude this income from income taxes by just sticking those numbers on form 2555 as well. So there's my first question: do I exclude my camming income from taxation on form 2555?

My second question is about investing. I thought I could use my camming income as a way to be eligible for Roth IRA contributions, but if self-employment tax alone doesn't open up this opportunity, I may have made a mistake and will have to correct my contribution. So my second question: can I contribute to a Roth IRA because I will pay self-employment taxes?

Any help is much appreciated; I've been researching this topic for months and continue to find information that seems to contradict what I read before.

I'm happy to answer any further questions if my situation isn't clearly explained.

sherr

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Re: American Abroad--Self-Employment and Roth IRA?
« Reply #1 on: September 25, 2013, 09:20:14 AM »
I know nothing about your first question, but in my completely uneducated opinion it sounds like you'd be lying about that income's source by including it on your form 2555.

As for the second question, yes you can contribute that money to an IRA. Any taxable income can be contributed to an IRA (you can't contribute more money than you had taxable income that year).

Additionally, as an Independent Contractor you would be eligible for opening a Solo 401k (either Roth or Traditional). You could do that if you wanted to save a lot more money that the contribution limits on your Roth IRA allow you to.

Your situation is fairly complicated, it may be worthwhile finding a tax accountant and paying for professional advice instead of asking on the internet.

beltim

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Re: American Abroad--Self-Employment and Roth IRA?
« Reply #2 on: September 25, 2013, 03:07:00 PM »
If you did the work in Korea, you should be able to count it as foreign earned income subject to the foreign earned income exclusion. From the IRS web site http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion---What-is-Foreign-Earned-Income

"The source of your earned income is the place where you perform the services for which you received the income. Foreign earned income is income you receive for performing personal services in a foreign country. Where or how you are paid has no effect on the source of the income. For example, income you receive for work done in France is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City."

Sherr is right that you are able to contribute to an IRA, but for the wrong reason.  Only earned income qualifies you to contribute to an IRA, NOT simply taxable income. And income excluded under the foreign earned income exclusion is still considered earned income for the purpose of contributing to an IRA, again for the IRS:
"Contributions to your individual retirement arrangements (IRAs) that are traditional IRAs or Roth IRAs are generally limited to the lesser of $5,000 ($6,000 if 50 or older) or your compensation that is includible in your gross income for the tax year. In determining compensation for this purpose, do not take into account amounts you exclude under either the foreign earned income exclusion or the foreign housing exclusion. Do not reduce your compensation by the foreign housing deduction."

From http://www.irs.gov/publications/p54/ch05.html#en_US_2012_publink100047579

seattlecyclone

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Re: American Abroad--Self-Employment and Roth IRA?
« Reply #3 on: September 25, 2013, 03:38:10 PM »
Sherr is right that you are able to contribute to an IRA, but for the wrong reason.  Only earned income qualifies you to contribute to an IRA, NOT simply taxable income. And income excluded under the foreign earned income exclusion is still considered earned income for the purpose of contributing to an IRA, again for the IRS:
"Contributions to your individual retirement arrangements (IRAs) that are traditional IRAs or Roth IRAs are generally limited to the lesser of $5,000 ($6,000 if 50 or older) or your compensation that is includible in your gross income for the tax year. In determining compensation for this purpose, do not take into account amounts you exclude under either the foreign earned income exclusion or the foreign housing exclusion. Do not reduce your compensation by the foreign housing deduction."

That quote from the IRS publication would seem to indicate that foreign income that you excluded from your tax return does not count as earned income for IRA contribution purposes. You would only be able to contribute to an IRA if you had earned income that exceeded the foreign exclusion limits.

beltim

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Re: American Abroad--Self-Employment and Roth IRA?
« Reply #4 on: September 25, 2013, 04:13:42 PM »
Ah yes.  Seattlecyclone is, of course, right.  Income excluded under the foreign earned income exclusion is not available for IRA contributions. To contribute to an IRA, you would have to not take the foreign earned income exclusion.  You may (depending on local taxes) be able to take a tax credit for foreign taxes paid, owe no US taxes, and still be able to contribute to an IRA.  This would require running through the situation with your exact tax situation, however.

nikki

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Re: American Abroad--Self-Employment and Roth IRA?
« Reply #5 on: September 25, 2013, 05:13:29 PM »
Thanks for chiming in, everyone. It's seeming more to me like I have made an error by contributing to a Roth IRA. I'll have to get this sorted out with Vanguard :(

We're talking very small amounts of income here: total, I probably make $35,000 a year between both income sources :S  In fact, my camming target was a clean $5,500 for the Roth limit, but I suppose all that doesn't matter now! I'll exclude camming income along with teaching income on 2555, pay self-employment taxes, and just throw my moneys in a taxable account instead of Roth.

Again, thanks so much. I realize I do have a complicated situation, and I couldn't bring myself to pay an international CPA $300 to answer questions in a half-hour session. I think I sort of knew the answer, but didn't want to face the reality that I made an error months ago haha!

seattlecyclone

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Re: American Abroad--Self-Employment and Roth IRA?
« Reply #6 on: September 27, 2013, 10:47:03 AM »
Are you required to exclude foreign income from your taxes, or is it an optional thing? I've never lived outside the US, so I'm not sure about many of these rules. If it's optional, you could just decide not to exclude $5,000 of your income, pay low taxes on that money, and stick it in your Roth.

lhamo

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Re: American Abroad--Self-Employment and Roth IRA?
« Reply #7 on: September 27, 2013, 03:16:40 PM »
My understanding of how the FEIE works is that once you elect to take it you have to do the calculations on all your income earned abroad -- you can't exclude part and not exclude part, at least not up to the limits of the exclusion (90kish these days).

If you ever travel back to the US and do some of your webcam work while on those trips, you could (and should) count that as US earned income and be able to contribute that to a Roth.  That is how DH and I do it -- we each take a business trip or two to the US every year, and when I calculate the exclusion I count the money earned during work days on those trips as US earned income, and we put that into our Roths every year.  It isn't a lot as the trips are short -- typically around $2-3k/person/year -- but every little bit helps.  You would want to be sure that you have either established tax domicile overseas, or else keep all travel to the US under the amounts that allow you to qualify under the physical presence test, though.  In our case we qualify under the tax domicile clause. 

nikki

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Re: American Abroad--Self-Employment and Roth IRA?
« Reply #8 on: September 27, 2013, 05:03:53 PM »
If you ever travel back to the US and do some of your webcam work while on those trips, you could (and should) count that as US earned income and be able to contribute that to a Roth. 

This is a great idea, but I haven't returned to the US since I left! And if I did, I'd be staying with family--can't exactly do that sort of work there, you know? Oh well. Loopholes exist, but probably not for me. No biggie :-)

Thanks for all of your comments!