U.S. Expats, Retirement Accounts, and the Foreign Earned Income Exclusion: What You Need to Know
- Jan 5
- 3 min read
For U.S. citizens and resident aliens living and working abroad, saving for retirement can be more complicated than for those residing in the United States. One of the most common questions is: Can I contribute to an IRA or other U.S. retirement account while living overseas? And how does the Foreign Earned Income Exclusion (FEIE) affect my ability to do so? Here’s a comprehensive look at the rules, pitfalls, and planning opportunities.
U.S. Expats and Retirement Account Contributions
Traditional and Roth IRAs
To contribute to a traditional or Roth IRA, you must have “compensation” (generally, earned income) that is includible in your gross income for the year. The annual contribution limit for 2026 is expected to be $7,500 ($8,600 if age 50 or older).
What Counts as Compensation?
Wages, salaries, professional fees, and other amounts received for personal services are considered compensation.
However, amounts you exclude from income under the FEIE or the foreign housing exclusion do not count as compensation for IRA contribution purposes.
Employer-Sponsored Plans (401(k), 403(b), etc.)
If you work for a U.S. employer abroad, you may be eligible to participate in a 401(k) or similar plan. Contributions are generally based on your includible compensation, and the same FEIE rules apply: only income included in your U.S. taxable income counts for contribution purposes.
The Foreign Earned Income Exclusion (FEIE) Trap
How the FEIE Works
The FEIE allows qualifying U.S. expats to exclude over $130,000 (for 2026, indexed annually for inflation) of foreign earned income from U.S. taxation. This is a valuable benefit, but it comes with a catch for retirement savers.
The Catch: Excluded Income Is Not Compensation for IRA Purposes
If you exclude all your foreign earned income under the FEIE (and/or the foreign housing exclusion), you have no compensation for IRA contribution purposes. This means you cannot contribute to a traditional or Roth IRA for that year, even if you earned a salary abroad.
Example:
Jane, a U.S. citizen living in Spain, earns $100,000 in salary from her Spanish employer.
She claims the FEIE and excludes the entire $100,000 from her U.S. taxable income.
For IRA purposes, Jane has $0 of compensation and cannot contribute to an IRA for that year.
Partial Exclusion If you only exclude part of your foreign earned income (for example, you earn $150,000, exclude $126,500, and include $23,500 in U.S. taxable income), you may contribute up to the lesser of the annual limit or your includible compensation ($23,500 in this example).
Employer Retirement Plans and the FEIE
For employer-sponsored plans, the same principle applies: only compensation included in your U.S. taxable income is eligible for plan contributions. If your entire salary is excluded under the FEIE, you may not be able to make elective deferrals to a 401(k) or similar plan.
Foreign Pension Plans
If you participate in a foreign pension plan, the U.S. tax treatment is complex and depends on whether the plan is considered “qualified” under U.S. law (most are not). Contributions to foreign plans are generally not deductible on your U.S. return, and the tax treatment of distributions can be complicated, often resulting in double taxation unless a tax treaty provides relief.
Planning Tips for Expats
Consider the trade-off: If you want to contribute to an IRA or 401(k), you may need to forgo the FEIE and instead claim the foreign tax credit, which allows you to include your foreign earned income in U.S. taxable income (and thus as compensation for retirement contributions), but offset the U.S. tax with credits for foreign taxes paid.
Partial exclusion: If your foreign-earned income exceeds the FEIE limit, you may be able to contribute to an IRA based on the includible portion.
Spousal IRA: If your spouse has U.S. source earned income, you may be able to contribute to a spousal IRA even if you have no includible compensation.
Consult a professional: The rules are complex, and the optimal strategy depends on your income, tax rates, and long-term plans.
Key Takeaways
You must have U.S.-taxable earned income to contribute to an IRA or employer plan.
Income excluded under the FEIE does not count as compensation for IRA purposes.
Consider the impact of the FEIE on your ability to save for retirement in U.S. accounts.
Foreign pension plans have their own U.S. tax complexities and may not offer the same tax benefits as U.S. plans.
Bottom line: The FEIE is a powerful tool for reducing U.S. tax, but it can unintentionally limit your ability to save for retirement in U.S. tax-advantaged accounts. Thoughtful planning helps you strike the right balance between minimizing tax today and building for tomorrow. As always, we’re here to guide you through the unique challenges that expat life brings.
