Many Americans who relocate overseas believe they have lost their ability to add funds to their U.S. retirement accounts including IRAs and 401ks. There are no restrictions on a non-resident American having an IRA. Restrictions are only related to contributions. Some individuals persist in making contributions without grasping the specific rules which govern the eligibility of U.S. citizens living abroad to maintain their contributions. Here we show how UK based Americans can use IRAs to grow retirement savings.
Use tax-efficient savings for US and UK individuals
Utilising different tax-wrapped investment vehicles from both the US and UK markets enables tax deferral while opening gross investment growth opportunities. Different tax savings vehicles in the US and UK help you accumulate assets in various tax buckets, including taxable or tax-deferred and possibly tax-exempt accounts. Doing this successfully throughout your earning years will leave you with capital to choose how to withdraw it in your retirement years with greater flexibility and options. One often overlooked vehicle for UK resident American’s is US Individual Retirement Accounts (IRA accounts), which are also recognised in the UK. There is a variant on this account called Roth IRA that can be attractive for non-deductible contributions to a pension (ie where no tax relief is available).
As IRAs are recognised in the US-UK Double Taxation Agreement, they are an effective retirement savings plan. They escape the punitive tax regime of the USA (Passive Foreign Investment Company) and UK (non-reporting funds), and they can accumulate income and capital gains without taxation in either country. They avoid the additional reporting requirements of other forms of investment accounts. This savings route is more favourable than unwrapped taxed accounts.
Tax relief and tax-deferred growth through IRA contributions while in the UK
US citizens who are deemed to have US-sourced earned income (the rules we outline below) can contribute to either a Traditional IRA or a Roth IRA. They will receive tax relief. The main rule for non-US resident contributions to an IRA is you need to have US income leftover after deductions and exclusions.
Traditional IRAs permit contributions up to a specified limit which grants you tax deductions that exactly match your contribution amount. The funds in traditional retirement accounts benefit from tax-deferment which allows you to postpone tax payments until you start making withdrawals.
Roth IRAs function like traditional IRAs but they contain several distinct differences.
- The account must be designated as a Roth IRA during the opening process.
- Earnings in Roth IRAs remain tax-free instead of being tax-deferred.
- You may access your Roth IRA contributions anytime without facing any tax charges or penalties as long as they are qualified distributions.
Anyone who is a U.S. citizen and earns income can make contributions to a Traditional IRA or Roth IRA under IRS rules regardless of their place of residence. Your eligibility for making contributions depends heavily on your tax filing method with the IRS, especially when claiming both the Foreign Earned Income Exclusion and the Foreign Tax Credit.
Understanding the Foreign Earned Income Exclusion (FEIE) for IRAs
The Foreign Earned Income Exclusion (FEIE) enables U.S. citizens working abroad to shield up to $126,500 of their foreign-earned income from U.S. tax obligations in 2025. Using FEIE to exclude all your income leads the IRS to classify you as having no taxable compensation, which then prevents you from making IRA contributions that year. You are permitted to make IRA contributions while claiming the Foreign Earned Income Exclusion as long as you retain some earned income after applying the exclusion.
✅ Example 1 – Eligible to Contribute:
The U.S. citizen Claire who resides in the UK makes $150,000 during the tax year 2025. She uses the FEIE to exclude $126,500 from her income which results in $23,500 of remaining earned income that is not excluded. This leftover income enables her to make contributions to an IRA.
❌ Example 2 – Not Eligible to Contribute:
John receives a salary of $95,000 while working in Scotland and applies the Foreign Earned Income Exclusion to eliminate his whole income from taxation. Since he does not have any remaining earned income after exclusions, he cannot make IRA contributions this tax year.
Alternative Strategy: Use the Foreign Tax Credit (FTC) to permit IRA contributions
Some expats opt for the Foreign Tax Credit which offers direct dollar-for-dollar offsets for taxes paid abroad rather than excluding income through the FEIE. Reporting your full foreign salary on your U.S. tax return via the FTC ensures your earned income stays recorded which allows you to maintain eligibility for IRA contributions.
Non-deductible Traditional IRA contribution
Individuals who cannot contribute directly to a Roth IRA because their income is too high still have a chance to make ‘backdoor’ Roth IRA contributions if they hold no other IRA balances. The process requires making an already taxable Traditional IRA contribution during 2025 of $7,000 followed by a direct conversion of this balance into a Roth IRA through a conversion process. The original contribution’s lack of tax relief ensures that the conversion process remains tax-exempt while moving funds into the Roth IRA as if they had been directly contributed. Hence the term ‘backdoor’ Roth IRA contribution. The main advantage of placing funds into a Roth IRA lies in the fact that money within this plan remains tax-free when qualified distributions occur.
2025 Contribution Limits
- Under age 50: Up to $7,000
- Age 50+: Up to $8,000 (includes catch-up contribution)
Note: These limits apply across both types of IRAs — you can split contributions between Traditional and Roth, but the combined total cannot exceed the limit.
Income limitations on Roth IRAs
For 2025, the income limits for contributing to a Roth IRA are based on your Modified Adjusted Gross Income (MAGI) and tax filing status.
| Filing Status | Full Contribution | Partial Contribution | No Contribution |
|---|---|---|---|
| Single / Head of Household | Up to $146,000 | $146,000 – $161,000 | Over $161,000 |
| Married Filing Jointly | Up to $230,000 | $230,000 – $240,000 | Over $240,000 |
| Married Filing Separately* | N/A | $0 – $10,000 | Over $10,000 |
Starting an IRA while living outside the USA in the UK
When you reside outside the USA and want to open an IRA because you have an income you report to the USA, we suggest opting for a U.S.-based IRA to be tax-efficient with your IRS taxes. All contributions made to a traditional IRA are tax-deductible in the year during which you make the contribution.
What About Self-Employed Expats?
If you’re self-employed overseas, your business income can qualify as earned income, assuming the FEIE does not exclude it. Self-employed expats may also be eligible for SEP IRAs or Solo 401(k)s, which allow for higher contribution limits based on income. This is a powerful savings opportunity for entrepreneurs and freelancers abroad — especially if you’re not using the FEIE. Under a SEP, the employer makes contributions to a traditional individual retirement arrangement (called a SEP IRA) set up by or for each eligible employee. A SEP IRA is owned and controlled by the employee, and the employer makes contributions to the financial institution where the SEP IRA is maintained.
If you would like assistance using the IRA financial planning ideas above please get in touch or book a financial appointment with us.