Does the Foreign Earned Income Exclusion Affect Eligibility for the Roth IRA?
If you are a U.S. citizen and work overseas, you can exclude some or all of your earnings from your taxable income, up to a maximum set by the Internal Revenue Service, if you meet certain criteria. Even if you qualify to exclude your overseas income under the Foreign Earned Income Exclusion Act, you may still be able to fund a Roth IRA.
According to the Foreign Earned Income Exclusion Act, you can omit the money you earn overseas from your taxable income if you satisfy three conditions. First, you must have earned income in a country other than the U.S. and your tax home -- or the area of your primary business, employment or post -- is outside the U.S. You must live in a country other than the U.S. for a full tax year. You can also be an American resident alien who lives in a country other than the U.S. for a whole tax year as well as a citizen or national of any country that has an income tax treaty with the U.S. Alternatively, you must be an U.S. citizen or American alien who remains in at least one country outside the U.S. for at least 330 days in any 12-month period.
Opening a Roth IRA
You can typically open a Roth IRA if you earn income in the year you establish your account and your modified adjusted gross income is below a certain level determined by your marital status and how you file your federal taxes. For example, if you are married, file your taxes separately from your spouse and live with your partner in the year you open your account, you can establish a Roth if your MAGI is less than $10,000, as of 2013. If you are married and file a joint federal tax return, you can open a Roth if your MAGI is less than $183,000.
Calculating Your Income
You can determine if you qualify to open and fund a Roth IRA by calculating your MAGI. In general, this will equal your adjusted gross income minus the Roth IRA conversions and rollovers from qualified retirement plans that you started during the tax year, plus various deductions and exclusions. The deductions and exclusions that will increase your MAGI include your foreign earned income exclusion, traditional IRA deduction, foreign housing exclusion or deduction, and domestic production activities deduction.
If you are eligible for the foreign earned income exclusion and qualify to open a Roth IRA, your ability to contribute to your Roth may be reduced or eliminated if your MAGI exceeds certain limits set by the IRS. As of 2013, the maximum yearly amount you can contribute to a Roth is $5,500. If you are over age 50, you can contribute up to $6,500. If you have multiple IRAs, the sum of your contributions to all of them cannot exceed these amounts.
Deborah Barlowe began writing professionally in 2010. With experience in earning securities and insurance licenses and having owned a successful business, her articles have focused predominantly on finance and entrepreneurship. Barlowe holds a bachelor’s degree in hotel administration from Cornell University.