While there are advantages to being a US taxpayer living in Singapore (SG)—eating chilli crab at hawker centers, hopping to Bali for a weekend getaway, or meeting people from across the world—it also comes with a host of tax and financial planning issues.
One question that comes up: Can I contribute to a Traditional IRA or Roth IRA?
To add: Should I contribute to a Traditional IRA or Roth IRA?
If you live in the US, there is a fairly clear-cut answer on whether you can contribute to a Traditional or Roth IRA based on your modified adjusted gross income (MAGI), filing status, and whether you or your spouse has a qualified retirement plan through work. If income is too high, you are phased out of deductible Traditional IRA contributions and direct Roth IRA contributions (i.e., not Backdoor Roth).
For US taxpayers in SG, the answer to whether you can/should contribute to a Traditional or Roth IRA has twists.
In 2022, for Traditional and Roth IRAs, you can contribute up to $6,000/year (below age 50) or $7,000/year (age 50+).*
To contribute to a Traditional or Roth IRA, you must have earned, taxable income (e.g., salary, bonus, commission, etc.). This excludes passive and investment income (e.g., rental income, dividends, and capital gains).
The IRS was kind enough to provide spousal provisions.
Example: Melissa earns $500,000/year. Her spouse, Jeff, does not work. Melissa may be able to contribute $7,000 to her IRA and $7,000 to Jeff's, depending on other factors.
Income limits determine whether you can deduct contributions to your Traditional IRA and make Roth IRA contributions. In 2022:
- Traditional IRA - Once MAGI reaches $68,000-$78,000 (Single) or $109,000-$129,000 (Married Filing Jointly), the ability to deduct contributions is phased out, provided you are covered by a qualified work retirement plan.
- Roth IRA - Once MAGI reaches $129,000-$144,000 (Single) or $204,000-$214,000 (Married Filing Jointly), the ability to contribute is phased out.
These income limits prevent high-income persons from receiving too much tax benefit—Uncle Sam wants his share!
Advanced: US Taxpayers Abroad—3 Twists
1. Foreign Earned Income Exclusion (FEIE) and Foreign Housing Exclusion (FHE)
The FEIE and FHE reduce US persons’ taxable income, which helps avoid double taxation (i.e., paying tax to SG and the US on the same income).
In 2022, FEIE and FHE are $112,000 and $82,300, respectively for SG. Taxable income can be significantly reduced depending on eligible housing expenses. These deductions can also prevent contributions to a Traditional or Roth IRA.
Example: Pete, age 30, is an engineer at a SG startup earning $125,000/year. Since he is below the income threshold, he is considering contributing $6,000 to his Roth IRA. If Pete was living in the US, this would be possible. However…
Pete also decides to take $112,000 FEIE and $13,000 FHE, bringing his adjusted gross income (AGI) to $0. Since Pete has $0 AGI (i.e., no earned, taxable income), he cannot make a Roth IRA contribution. Sorry, Pete!
2. No Employer Retirement Plan
Living in SG, you likely do not have a qualified work retirement plan (e.g., 401k). This prevents taking advantage of associated tax benefits; Traditional and Roth IRAs provide some relief.
Example: Jeff, age 40, works at Amazon earning $500,000/year. His US spouse does not work. After taking FEIE and FHE, his AGI is $355,000/year. While his income is too high to contribute directly to a Roth IRA, he can do a Backdoor Roth (a tactic enabling high-income persons to circumvent Roth IRA income limits**). Jeff can contribute $6,000 to his Roth IRA and $6,000 to his wife’s (total: $12,000). This might not seem like a lot, but after 10 years there would be $120,000 of contributions and, assuming a 6%/year investment return, ~$47,700 of tax-free growth!
While saving in a Traditional or Roth IRA is typically a “no-brainer” in the US, due to tax advantages, the same does not apply for expats.
Example: Melvin is a tech executive in SG earning $1MM/year. His wife is from Germany. They will retire in Berlin. Melvin is considering doing a $6,000 Backdoor Roth for tax-advantaged growth. However, under current rules, Germany does not recognize the tax-free status of Roth IRAs. If he contributes $6,000 to a Roth IRA, he will pay tax now and, again, on earnings when withdrawing funds during retirement. Nicht gut! (Not good!)
IRA and Roth IRAs may offer benefits such as deductions and tax-advantaged growth, but as a US taxpayer in SG the landscape is different. These accounts still may be very beneficial, but a more thoughtful approach must be applied. It is important to consider other factors, namely:
- How long do you want to live abroad?
- Where do you want to retire?
- What other investments do you own and what are the tax characteristics?
- What nationality is your spouse?
- What is the purpose of the funds? Growth? Charity? Legacy?
- When will you need the funds?
- Is there a tax treaty between your abroad country and the US?
- How does the tax treaty regard IRA and Roth IRA distributions?
Please reach out for more information on how IRAs fit into your unique financial plan and our wealth planning services.