In order to contribute to a Roth-IRA account you must have taxable earned income equal to, or greater than, the contribution you are making, and this contribution cannot exceed the annual limit of $5,500 ($6,500 for people over 50). On top of this you cannot make the full contribution to a Roth IRA if your modified adjusted gross income (AGI) is higher than $117,000 ($184,000 when filing jointly). For many US expats this leaves them completely shut out of the system.
there is a solution that does not require taxable earned income and does not any income threshold; a Solo Roth-401K.
The majority of expats take advantage of the foreign earned income exclusion (FEIE), whereby they exclude up to $100,800 of their income on their annual tax return. The result of this is that they have no taxable earned income and therefore cannot make eligible contributions. There are also expats that have adjusted gross incomes over $117,000 and are therefore unable to make full contributions .
This has left many US expats feeling that they are unable to take advantage of the tremendous tax benefits of a Roth IRA. However, there is a solution that does not require taxable earned income and does not have any income threshold; a Solo Roth-401K.
A Solo Roth 401K plan does not have any income requirements and therefore you are still eligible to make contributions if you exclude all of your income using the FEIE, or have an AGI over $117,000.
A Solo Roth 401K plan will allow you to make after-tax contributions just like a Roth IRA. You are able to make contributions equal to your income up to a maximum contribution of $18,000 per year ($24,000 if aged over 50). As these are after-tax contributions they will be treated the same a Roth IRA, meaning tax-free growth and tax-free income, if withdrawals are made after you are 59.5 years old. This makes them an extremely powerful retirement planning tool.
Furthermore, you may also make take advantage of the employer contributions, which depending on your income would allow you to make further annual contributions up to $35,000. However, these will be treated on a pre-tax basis, meaning they would not be taxed annually, but would be taxed as income when withdrawals are made after age 59.5. This can provide a great benefit for people with higher incomes that have a US income tax liability because any contributions that you make will reduce your taxable income.
HOW COULD A SOLO ROTH 401K HELP YOU?
EXAMPLE 1
John is an international school teacher who earns $75,000 per year. John is paid a NET salary in China and therefore has no ability to make pre-tax contributions. He also excludes all of his income using the foreign earned income exclusion and has no other taxable earned income.
We were able to help John set up a Solo Roth 401K plan and now he is able to save up to $18,000 per year towards his retirement, more than three times what he would be able to contribute to a Roth IRA. This money is treated as after-tax contributions so it will receive tax-free growth and tax-free income during retirement.
EXAMPLE 2
Sarah is a lawyer for a multi-national firm in Beijing and is paid a NET salary in China. She has an adjusted gross income of $150,000. Sarah excludes $100,800 of her income using the foreign earned income exclusion and claims a foreign tax credit for the remaining $49,200. Due to Sarah’s AGI she is unable to make any Roth IRA contribution.
We helped Sarah set up a Solo Roth 401K plan. Like John she can now make after-tax contributions of $18,000, which will grow tax-free and provide tax-free income in retirement.
We also advised Sarah to take advantage of the employer’s contribution, which allows her to make pre-tax contributions up to $35,000. This money will grow tax-deferred till retirement and will then be taxed as income.
Sarah has now gone from making annual savings of $0 towards her retirement to $53,000 and all her savings are receiving preferential tax treatment.
A Solo Roth 401K is available to virtually all US expatriates who are living and working abroad. This simple piece of financial planning is US regulated and provides you with IRS compliant tax-free growth and income in retirement. We can help you to create your own Solo Roth 401K so that you can take advantage of this enormous tax benefit today.