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What is a Roth IRA?

Updated: Sep 8

While there are a number of retirement investment plans available for American taxpayers, some serve as more attractive vehicles of investing based on each individual’s circumstances. Two common forms of retirement investments are the IRA (individual retirement account), also referred to as traditional IRA, and Roth IRA. A Roth IRA differs in that while there are no immediate tax savings with contributions, the principal and investment earnings that are drawn out in retirement are tax-free.


Why Roth IRA?

  • If your tax rate is currently lower than the expected tax rate during retirement, it would make more sense to get taxed now than later

  • If the tax that will be paid at the time of contribution can be paid out of pocket and not from salary—this allows your IRA balance to remain intact and grow without being affected by taxes

  • There is no minimum distribution requirement, meaning no minimum amount that is required to be withdrawn from your account annually

How to convert?


The backdoor method is most optimal when Expats without an existing IRA establish a new one and make non-deductible contributions (due to earning foreign income). Any Expat, regardless of income, can create a traditional IRA account and make non-deductible contributions, which will later be switched into a Roth IRA account. Because these contributions were non-deductible, the conversion will be tax-free except for any additional earnings before the conversion.

  • All or part of a traditional IRA can be converted into a Roth IRA

  • Foreign Earned Income Exclusion (FEIE) method: For people already using FEIE, a method of tax exemption for the first $107,600 (in 2020) earned by American expats, the standard deduction amount can be used as the amount converted into a Roth IRA.

Many Americans will find this option of the Roth IRA advantageous, as it can allow their retirement accounts to grow tax-free for an extended period of time. However, because of many different circumstances that can prevent the Roth IRA from being the most optimal choice, it is advised that individuals consult with a financial planner beforehand to make sure that this option is ideal for them.




Get a complimentary copy of the American expat guide at https://www.dunhillfinancial.com/american-expat-financial-guide for more information about the financial planning process as an American expat. You can also visit www.dunhillfinancial.com.


DUNHILL FINANCIAL, LLC IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS, OR INVESTMENT STRATEGIES. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.


Sources

Mir Taxes - Expats Convert Traditional IRA to a Roth Tax-Free Using FEIE

Mir Taxes - The "Backdoor" Roth IRA Strategy

Kitces - Isolating IRA Basis For More Tax Efficient Roth IRA Conversions

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