For U.S. citizens and American expatriates living abroad, the term “International IRA” is sometimes used in the context of a international IRA. Its like a conventional IRA recognised by the IRS but suitable for expat wealth management.
What is a U.S. IRA?
Before diving into the “international” aspect, let’s briefly recap what a traditional U.S. IRA is. An Individual Retirement Account (IRA) is a personal savings plan that offers tax benefits for retirement. The two most common types are:
- Traditional IRA: Contributions may be tax-deductible, and earnings grow tax-deferred until withdrawal in retirement, when they are taxed as ordinary income.
- Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals in retirement are entirely tax-free.
Both types offer a wide range of investment options, allowing individuals to choose how their money is invested.
What is an “International” IRA?
An “International IRA” is commonly used to describe an expat IRA that helps in the following areas:
- Maintaining Eligibility to Contribute to a U.S. IRA. To contribute to a U.S. IRA, in most cases, one must have “earned income.” This can be an issue for some expats who qualify to exclude all of their foreign earned income from U.S. taxation under the Foreign Earned Income Exclusion (FEIE). The problem is that the “excluded” income under the FEIE is not considered “taxable earned income” under the U.S. tax law. The result is that the individual has no “taxable earned income” to base an IRA contribution on. Though if seeking in-retirement benefits as a dual citizen, after tax contributions can be ringfenced to provide benefits in retirement.
- Opening or Maintaining an IRA at a U.S. Brokerage Firm. Many U.S.-based brokerage firms and banks have policies that limit or bar non-U.S. residents from opening or maintaining brokerage or bank accounts. This issue is particularly tricky with IRAs. Many Americans think that as long as an IRA is an IRA, they can open it and maintain it anywhere. But that is not always true since most U.S. financial institutions have rules and compliance requirements that preclude opening accounts for non-U.S. residents (the Foreign Account Tax Compliance Act or FATCA is one reason why banks are hesitant to open accounts for non-U.S. residents).
- Foreign Taxation of U.S. IRA Distributions. U.S. tax law provides favorable tax treatment for distributions from U.S. retirement plans. But those distributions may be subject to tax in the foreign country where the expat resides. There may be tax treaties in place to prevent this double taxation, but they must be properly applied. Failure to take the necessary steps to avoid double taxation can result in paying unnecessary foreign tax.. U.S. tax law provides favourable tax treatment for distributions from U.S. retirement plans. But those distributions may be subject to tax in the foreign country where the expat resides. There may be tax treaties in place to prevent this double taxation, but they must be properly applied. Failure to take the necessary steps to avoid double taxation can result in paying unnecessary foreign tax.
- Currency and Investment Considerations. Managing multiple currencies, as well as the desire to invest in global securities, are also reasons an expat would want to call upon the services of a financial advisor familiar with international investing.
How an “International IRA” Helps Expats
Investment firms that promise to provide “international IRA” services are are geared towards American expats. They can help you with:
- Navigating expat tax issues like the FEIE, FTC, and what they mean for your IRA contributions and withdrawals.
- Handling cross-border reporting requirements like FATCA and FBAR for U.S. taxpayers living overseas.
- Opening and managing U.S. IRAs on behalf of non-resident Americans. Many investment companies will have systems and relationships in place to do this.
- Offering holistic wealth management services that take into account an expat’s entire financial situation, not just their U.S. IRA. This could include foreign pension plans, international investments, and currency issues.
- Providing tools and communication channels for expats to manage their accounts remotely.
Is an “International IRA” Right for You?
For US expats that are looking to retain their US pension vehicles to continue to benefit from the tax advantages these accounts offer, seeking a company that has an “International IRA” could be an wise choice. This does not refer to some new or unique form of pension. Instead, it is a description for when your US pension vehicle (IRA) is being managed by a group that specialises in working with US expats.
Before signing up for any of these services it is important to:
- Check Credentials: Make sure the financial firm and its representatives are licensed and regulated to work with US citizens, particularly those residing abroad.
- Understand Fees: Be upfront about all management fees, advisory fees, and any other costs associated with the “International IRA” service.
- Expertise: Verify their experience in managing retirement accounts for expatriates and their knowledge of both US and relevant international tax laws.
An “International IRA” allows US expats to manage their US Individual Retirement Accounts with the necessary expertise to handle the nuances of expatriate life and international taxation.