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.

Changing Foreign Earned Income Exclusion (FEIE) to Foreign Tax Credit (FTC) to be eligible for IRA contributions

Revoking the Foreign Earned Income Exclusion (FEIE) to claim the Foreign Tax Credit (FTC) is a major decision with significant tax implications. Here’s a quick summary of the steps to do it, and the most important tax consequences to consider.

How to revoke foreign earned income exclusion

• Stop Filing Form 2555: Revoking your FEIE is easy. You just stop filing the IRS Form 2555 which is the form used to claim the exclusion.
• Attach a “Revocation” Statement to your Tax Return: The IRS says you must attach a statement to your tax return (or amended return) for the first year in which you do not want to exclude foreign earned income. Your statement must clearly indicate you are “revoking” your prior election to exclude foreign earned income.
• File Form 1116: In the year of revocation you will file IRS Form 1116 to claim the FTC. You would report all of your worldwide income on your Form 1040, then use Form 1116 to calculate the credit for the foreign taxes you paid.

Note that if you are revoking the FEIE on an already-filed tax return, you would need to file an amended return using Form 1040-X.

Important tax consequences of revoking the Foreign Earned Income Exclusion (FEIE)

There is one major consequence to revoking the FEIE that you need to fully understand before making a decision.

• 5-Year ban on re-electing the FEIE: You cannot re-elect the FEIE for five consecutive tax years once you have revoked it. There is one exception, but it requires a special IRS ruling and is both an onerous and expensive process. The IRS has no obligation to grant the ruling. This 5-year ban is the single most important thing to remember about revoking the FEIE.

The 5-year restriction really makes the timing of the decision critical. Here are some things to think about:

• Ideally, revoke the FEIE right before you move to a higher-tax country. If you are moving from a low-tax country to a high-tax country (like from the UAE to the UK for example), it is usually best to revoke the FEIE in your first full tax year in your new country. This maximizes your foreign tax credit carryovers for future years in the high-tax country.
• Do not revoke the FEIE if you plan to return to the U.S. or a low-tax country within 5 years.  If you think there is a strong possibility you will be back in the U.S. or living in a low-tax country (like Singapore) within the next five years, then revoking the FEIE is probably not a good idea. You might end up paying higher U.S. tax than necessary for five years.

Financial implications of switching to the Foreign Tax Credit (FTC)

Switching from the FEIE to the FTC changes your U.S. tax strategy from one of income exclusion, to one of tax credits.

• Income is Now Taxable (and a Basis for IRA Contributions) The most obvious implication for retirement savings is that the foreign income that you earn now becomes **taxable** on your U.S. tax return. So, you now have a basis to make IRA contributions even if you have already paid more foreign tax than you owe to the U.S. and thus, have no net U.S. tax liability.
• Tax Credits may be carried forward: The ability to carry forward excess credits is one of the primary reasons to switch to the FTC. If the foreign tax that you paid was higher than your U.S. tax liability on the same income, you are allowed to carry that excess credit forward for up to 10 years to offset U.S. tax on future foreign-sourced income (typically investment income). This can be a huge long-term tax-saving strategy for high-income earners.
• Foreign taxes that are eligible for the FTC cannot be “double dipped” The IRS is adamant on this point: you cannot claim the FTC on income that you have already excluded using the FEIE.
• Calculating taxes with the FTC is more complex Filing using the FTC (Form 1116) is generally more complex than filing using the FEIE (Form 2555). The FTC calculation includes a “limitation” which ensures the credit never exceeds the U.S. tax that would have been owed on the foreign income.

When to Switch and when to not

Switch to FTC when:

• You live in a country with an income tax rate higher than the U.S. rate.
• Your foreign earned income is significantly more than the FEIE limit.
• You have significant passive income (interest, dividends, etc.) that is taxed abroad. Passive income is not eligible for the FEIE, but it is for the FTC.

Stick with FEIE when:

• You live in a country with very low (or no) income tax.
• Your foreign earned income is well below the FEIE limit.
• You want to avoid the complexity of Form 1116 and the FTC carryover rules.

Because of the 5-year restriction and the potential tax consequences of this decision, it is recommended that you work with a tax professional that specializes in U.S. expatriate taxes before revoking the Foreign Earned Income Exclusion.

Parents contributing to siblings IRAs

If you are a U.S. citizen living outside the U.S., and this includes young U.S. citizens, you will need to deal with U.S. tax laws. This can be complicated if you live in the U.K. as a young adult and you and your parents may be trying to help you with retirement savings. Contributing to a Roth IRA as a young U.S. citizen living in the UK is a little different. The only way to make a contribution is for the parent to give the funds to the U.S. citizen child as long as the child has earned income from a job and that income is taxable to the IRS even if it is earned outside of the U.S. There is no other way to justify a contribution.

Here we consider a number of real-world examples in which a U.S. citizen (working and earning income outside the U.S.) is able to make a valid IRA contribution, and where a parent is able to help fund that contribution.

Example 1: The Child Using the Foreign Tax Credit (FTC)

Scenario: A 25-year-old U.S. citizen lives and works in the UK as a software engineer, making the equivalent of $80,000 for the year. She is paying UK income tax on that salary. The parents also live in the UK and want to help their child save for retirement.

The IRA Contribution: The child has some decisions to make when it comes to filing a U.S. tax return and avoiding double taxation. She can either use the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC).

We live in the UK where the tax rate is higher than the U.S. tax rate, so the young adult will likely benefit more from the Foreign Tax Credit (FTC).

By using the FTC, her $80,000 foreign earned income is “taxable” on the U.S. return, and she can claim a credit for the taxes paid in the UK. This usually wipes out her U.S. tax bill.

Since the income is “taxable,” the young adult has the requisite basis in the income to contribute up to $7,000 (2024/2025 limit) to a Roth IRA.

Parent’s Role: The parents can gift the $7,000 to the child, who then puts the money in his or her personal Roth IRA. Since the gift is so well below the annual gift tax exclusion ($19,000 for 2025), there are no gift tax consequences to the parents.

Example 2: The Child Using the Foreign Earned Income Exclusion (FEIE)

Scenario: A 23-year-old U.S. citizen living in a low/no income tax country like the United Arab Emirates works as an English teacher making the equivalent of $45,000.

The IRA Contribution: This child is an ideal candidate for the Foreign Earned Income Exclusion (FEIE). By using the FEIE, she can exclude all of the $45,000 of income from U.S. taxable income.

The Catch: As you can see, we run into the same problem we have encountered before with the FEIE. Income that is excluded from tax via the FEIE is not “earned income” for the purposes of an IRA contribution. This means that this young adult can’t contribute to a Roth IRA, even though they have an obvious earned income source. This is unfortunately a fairly common issue for U.S. citizens living in low/no-tax countries.

Parent’s Role: In this case, parents in the UK (or parents living in most countries) can’t contribute to the child’s IRA. This is because the child themselves doesn’t meet the most basic earned income requirement for a contribution. The child will have to change their tax strategy in some way (e.g. take the FTC, which may not be that helpful in a no-tax country) or find a separate source of U.S. earned income to qualify.

Example 3: The Young Adult with U.S. and Foreign Income

Scenario: A 20-year-old U.S. citizen university student is studying in Scotland but works a summer internship back home in the U.S., earning $3,000. The rest of the year, they work in a local shop as a part-time job making the equivalent of $500.

The IRA Contribution: This young adult has two sources of earned income.

$3,000 from the U.S. internship is U.S. source earned income. This source of earned income alone is enough to justify an IRA contribution.

$500 of wages from the job in Scotland is foreign earned income. The student could either use the FEIE or the FTC on this income.

Since the student has at least $3,000 of U.S. source earned income, they can contribute up to $3,000 to a Roth IRA. Remember the contribution limit is the lower of the annual limit or their earned income.

Parent’s Role: The parents can give the child the money (e.g. up to $3,000) to fund the Roth IRA. The parent’s gift is well below the annual gift tax exclusion. This is a great way to help the student save some of the money from their pay check that they otherwise might just spend.