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Author: geroxx One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121150  
Subject: International employee 401K's and IRA's Date: 2/19/2000 9:34 AM
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I currently work for an American Company on international assignment. My income is not taxable due to the $75K income exclusion. When I file taxes I file a 2555 or 2555ez along with a 1040. My income is in the $30K to $50K range so I am not even close to the $75K limit.

I have a company sponsored 401K plan where I contribute 4% (After Tax) contributions.

My questions are:

What will be the tax liabilities for the 401K since I contributed After Tax (even though I don't pay taxes on my income)when I retire and start pulling from the account?

My company was just sold and the new company has a 401K also. All of my future contributions will now go to the new companies 401K. Can I roll my old companies 401K into a Triditional IRA or Roth IRA?

Can I contribute to a Roth IRA in conjunction to my 401K? Remember that my income is excluded form Taxation.

I really have a bucket full of worms here. I am just curious if anyone has seen this type of situtation before.

Thanks for any help

G

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29450 of 121150
Subject: Re: International employee 401K's and IRA's Date: 2/21/2000 10:26 AM
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<<I currently work for an American Company on international assignment. My income is not taxable due to the $75K income exclusion.>>


Well...it's actually $76,000 for year 2000

<< When I file taxes I file a 2555 or 2555ez along with a 1040. My income is in the $30K to $50K range so I am not even close to the $75K limit.>>

Right...you must file Form 2555 (or 2555EZ) in order to claim the foreign earned income credit.

<<I have a company sponsored 401K plan where I contribute 4% (After Tax) contributions.>>

Ok....

<<My questions are:

What will be the tax liabilities for the 401K since I contributed After Tax (even though I don't pay taxes on my income)when I retire and start pulling from the account?>>

You'll pay taxes on the distributions...at ordinary income rates. This is one reason that a number of ex-pats shun 401k plans in favor of "taxable" investments during their time out of the country. Why convert non-taxable income now into taxable income in the future??

<<My company was just sold and the new company has a 401K also. All of my future contributions will now go to the new companies 401K. Can I roll my old companies 401K into a Triditional IRA or Roth IRA?>>

You'll have to check with your plan administrator. You will likely have the option of pulling your 401k money out. Then you could move it to a traditional IRA...and then to a Roth IRA should you desire. And, depending upon the amount involved, it might be fairly tax-painless. But remember that any conversion income (from a traditional IRA to a Roth IRA) will not be covered under the foreign earned income exclusion. So it might be subject to taxes.

<<Can I contribute to a Roth IRA in conjunction to my 401K? Remember that my income is excluded form Taxation.>>

Nope...not without earned income. And Uncle Sammy says that if you "shelter" your foreign earned income with the exclusion, you have no earned income for IRA testing purposes. I believe that you can elect to exclude all but $2k of your earned income, and then use that $2k to fund an IRA account (either traditional or Roth). But other tax pros disagree with me. Take it for what you paid for it.

<<I really have a bucket full of worms here. I am just curious if anyone has seen this type of situtation before.>>

More than once... :-)

TMF Taxes
Roy



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Author: Skwire One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29464 of 121150
Subject: Re: International employee 401K's and IRA's Date: 2/21/2000 11:30 AM
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Nope...not without earned income. And Uncle Sammy says that if you "shelter" your foreign earned income with the exclusion, you have no earned income for IRA testing purposes. I believe that you can elect to exclude all but $2k of your earned income, and then use that $2k to fund an IRA account (either traditional or Roth). But other tax pros disagree with me. Take it for what you paid for it.

Hi TMF Taxes,

I assume you already looked at my questions about this in Post #28469, but in case you haven't, I hope you won't mind if I repose them (I will only summarize that post).

A previous post [#27414] indicated that for IRS's proposed regulations indicate that income eligible for the foreign earned income exclusion is not "includible" in gross income and, therefore, cannot be used towards IRA contributions. On the other hand, if the standard is whether the amount is includible and not whether it is included, why do you need to reach the issue of whether you can make a partial inclusion?

Thanks in advance,

Skwire

Logic and taxation are not always the best of friends. -- James McReynolds

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Author: Skwire One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29465 of 121150
Subject: Re: International employee 401K's and IRA's Date: 2/21/2000 12:09 PM
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Nope...not without earned income. And Uncle Sammy says that if you "shelter" your foreign earned income with the exclusion, you have no earned income for IRA testing purposes. I believe that you can elect to exclude all but $2k of your earned income, and then use that $2k to fund an IRA account (either traditional or Roth). But other tax pros disagree with me. Take it for what you paid for it.

I just realized that I mischaracterized part of the issue in my prior post - sorry. The proposed regulation only indicates that amounts EXCLUDED under the exclusion are not treated as "includible" in earned income. However, this has no bearing on whether you can elect to exclude all but a portion of your foreign earned income. My question really was (or at least should have been) can one take the position that there is a difference between includible and included similar to the distinction between allowable and allowed. If the plain meaning of includible is an amount that could be included, whether excluded or not, can the IRS change the law by issuing (proposed) regulations indicating that excluded amounts are not includible. To bolster the argument that there is a difference between included and includible, I would note that the former phrase is used when defining earned income in the self-employment income context.

Sorry for muddying the waters yet again!

The hardest thing in the world to understand is the Income Tax – Albert Einstein

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Author: geroxx One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29516 of 121150
Subject: Re: International employee 401K's and IRA's Date: 2/21/2000 7:18 PM
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Thanks... I'll need to check on how to keep $2K held out to be taxed...

Thanks Again.

G


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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29555 of 121150
Subject: Re: International employee 401K's and IRA's Date: 2/22/2000 9:10 AM
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<<A previous post [#27414] indicated that for IRS's proposed regulations indicate that income eligible for the foreign earned income exclusion is not "includible" in gross income and, therefore, cannot be used towards IRA contributions. On the other hand, if the standard is whether the amount is includible and not whether it is included, why do you need to reach the issue of whether you can make a partial inclusion?>>

I read the law and regulations regarding the foreign earned income question as an election. It appears that others read it as an "all or nothing" issue...if you make the election, you're required to exclude all of the income in question.

I just don't read it that way. I just wanted to disclose the fact that other tax pros (both in this folder and elsewhere) disagree with my position. But until I can research the issue in greater detail, I remain unconvinced that their position is appropriate.

I just wanted to mention it in the spirit of full disclosure.

TMF Taxes
Roy



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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29557 of 121150
Subject: Re: International employee 401K's and IRA's Date: 2/22/2000 9:15 AM
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<<I just realized that I mischaracterized part of the issue in my prior post - sorry. The proposed regulation only indicates that amounts EXCLUDED under the exclusion are not treated as "includible" in earned income. However, this has no bearing on whether you can elect to exclude all but a portion of your foreign earned income. My question really was (or at least should have been) can one take the position that there is a difference between includible and included similar to the distinction between allowable and allowed.>>

You have stated my position better than I could. I believe that the answer is that you can elect to exclude all or a part of your earned income. I don't believe that it's an "all or nothing" situation.

<< If the plain meaning of includible is an amount that could be included, whether excluded or not, can the IRS change the law by issuing (proposed) regulations indicating that excluded amounts are not includible.>>

I would hate to say "change". But IRS can issue regulations that interpret the law...based upon the way THEY read it. Which is why the courts are the ultimate arbitrator.

<< To bolster the argument that there is a difference between included and includible, I would note that the former phrase is used when defining earned income in the self-employment income context.>>

Again...agreed.

TMF Taxes
Roy


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