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Author: cheezyches One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121585  
Subject: Roth IRA and foreign income Date: 1/23/2004 3:17 AM
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Hi all,

Two years ago (2002) my wife and I opened up a Roth IRA and made 2002 contribution. Halfway through the year however we moved to South Africa for a two-year work contract. We earn a salary that is taxed by the South African government (so it should quality as earned income). We also claim the salary on our tax return, however we are able to claim a "foreign earned income exclusion" which allows us to not pay U.S. taxes on the income. For the 2003 tax year, we all of our earned income was made in South Africa.

We would like to make a 2003 contribution, but cannot quite tell if it is legal. Does anyone know the answer to this one, or a place I could go for the answer?

thank you,

John
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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68792 of 121585
Subject: Re: Roth IRA and foreign income Date: 1/23/2004 6:49 AM
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Two years ago (2002) my wife and I opened up a Roth IRA and made 2002 contribution. Halfway through the year however we moved to South Africa for a two-year work contract. We earn a salary that is taxed by the South African government (so it should quality as earned income). We also claim the salary on our tax return, however we are able to claim a "foreign earned income exclusion" which allows us to not pay U.S. taxes on the income. For the 2003 tax year, we all of our earned income was made in South Africa.

We would like to make a 2003 contribution, but cannot quite tell if it is legal. Does anyone know the answer to this one, or a place I could go for the answer?


You have to have taxable compensation income in order to contribute to your IRA (Roth or traditional). If all of your compensation income is excluded under the foreign income exclusion, then you cannot make a contribution in 2003.

Ira

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Author: crre Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69039 of 121585
Subject: Re: Roth IRA and foreign income Date: 1/31/2004 10:09 AM
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i don't know the answer. but the answer you got from ira seems to contradict this:

http://boards.fool.com/Message.asp?mid=20192896

i myself have foreign income and know from experience that you have to read the rules carefully. for some purposes you need to add back the amount excluded by the foreign earned income exclusion, for some purposes you don't.

c.


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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69057 of 121585
Subject: Re: Roth IRA and foreign income Date: 1/31/2004 6:05 PM
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i don't know the answer. but the answer you got from ira seems to contradict this:

http://boards.fool.com/Message.asp?mid=20192896

i myself have foreign income and know from experience that you have to read the rules carefully. for some purposes you need to add back the amount excluded by the foreign earned income exclusion, for some purposes you don't.


No, my answer does not contradict the post you referenced above. In that post, the taxpayer had $86K in foreign earned income, of which $80K was excluded. There was still $6K of taxable foreign compensation which could be used to qualify for a Roth contribution.

In the case I responded to, all of the earned compensation was excluded, leaving no taxable compensation to qualify for the Roth contribution.

Ira

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Author: crre Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69089 of 121585
Subject: Re: Roth IRA and foreign income Date: 2/1/2004 2:08 PM
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ira,

In the case I responded to, all of the earned compensation was excluded, leaving no taxable compensation to qualify for the Roth contribution.

but the post i referenced notes that foreign earned income is not excluded for the purposes of the roth. see the definition of modified agi in pub. 590, p. 55:

http://www.irs.gov/pub/irs-pdf/p590.pdf

in other words, it doesn't matter where the income was earned, or if it was excluded under the foreign earned income exclusion. it can be (must be!) used to calculate roth contributions (and traditional ira contributions as well, see p. 15).

c.

disclaimer: i am not a tax professional, nor do i ever intend to be one. i am merely a u.s. citizen residing abroad who has become fascinated by the intricacies of the foreign earned income exclusion even since i discovered that said intricacies happen to work to my advantage.




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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69091 of 121585
Subject: Re: Roth IRA and foreign income Date: 2/1/2004 3:02 PM
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I believe Ira's right and you're wrong...

It's quite true that excluded foreign earned income is added back in to compute the MAGI, but that doesn't help. The problem is that there is no taxable compensation - in Chap 1, p 8, it clearly says that amounts excluded (such as foreign earned income) are NOT compensation. Then see p 54, where it says that in order to contribute to a Roth you must have taxable compensation and a MAGI less than a certain threshold. Without the taxable compensation, you never make it to the MAGI part.

Lorenzo

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Author: crre Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69093 of 121585
Subject: Re: Roth IRA and foreign income Date: 2/1/2004 4:02 PM
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It's quite true that excluded foreign earned income is added back in to compute the MAGI, but that doesn't help. The problem is that there is no taxable compensation - in Chap 1, p 8, it clearly says that amounts excluded (such as foreign earned income) are NOT compensation.

yes, i see. so ira is right that if the op and his wife had no taxable compensation, they could not make a contribution. however, how do we know that they had no taxable compensation? all he said was that all of their income was foreign, and that they paid no u.s. taxes. that doesn't mean that all of it is excluded. for instance, if one or both of them made slightly over the limit, they could very well have taxable compensation but pay no u.s. taxes.

c.


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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69096 of 121585
Subject: Re: Roth IRA and foreign income Date: 2/1/2004 7:10 PM
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In the case I responded to, all of the earned compensation was excluded, leaving no taxable compensation to qualify for the Roth contribution.

but the post i referenced notes that foreign earned income is not excluded for the purposes of the roth. see the definition of modified agi in pub. 590, p. 55:

http://www.irs.gov/pub/irs-pdf/p590.pdf


The starting point for any IRA contribution is taxable earned compensation. See Table 1-1 on page 8. If there is no taxable earned compensation there is no IRA contribution. PERIOD.

The issue addressed on page 50 is the phase out of eligibility for contributing to a Roth IRA based on MAGI. If you have a potential contribution, it may be limited or excluded entirely, based on MAGI. Here, you have to add back the earned income excluded under the foreign earned income exclusion.

Ira



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Author: ONuallainxx One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69102 of 121585
Subject: Re: Roth IRA and foreign income Date: 2/2/2004 7:21 AM
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<<disclaimer: i am not a tax professional, nor do i ever intend to be one. i am merely a u.s. citizen residing abroad who has become fascinated by the intricacies of the foreign earned income exclusion even since i discovered that said intricacies happen to work to my advantage.<<



ccre,

I am also a u.s. citizen residing abroad.

I am also a tax professional.

What Ira is telling you is correct:

1. "income" for purposes of a qualifying Roth contribution must be included in taxable gross income. Any foreign earned income EXcluded under §911 is, by definition, not INcluded in gross taxable income and cannot, therefore, be used as the basis for a Roth contribution (or a traditional IRA either) - assuming you would "otherwise qualify".

2. If, however, you have earned income, some of which is excluded under §911 and some of which, for whatever reason, is not, then you must determine if you "otherwise qualify". One criterion you must meet to qualify is the Modified Adjusted Gross Income (MAGI) limitation for your filing status. For purposes of determining MAGI, you must add back to your Adjusted Gross Income (which includes all kinds of income: earned, unearned, foreign, domestic,etc.) whatever amounts you DID exclude under §911. If the resulting MAGI number is too high, then even if you did have Roth qualified earned income, you do not qualify to contribute to a Roth account - but you may still be able to make non-deductible contributions to a traditional IRA account.

So to sum up:

In order to qualify to make a contribution to an IRA account, you must

1. have earned income that is included in your gross taxable income and

2. the total of that income together with all other income that is included in MAGI must not exceed certain levels.






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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69117 of 121585
Subject: Re: Roth IRA and foreign income Date: 2/2/2004 5:04 PM
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After some further discussion off-line with Cindy (ccre), I decided it might be worthwhile to soften my previous response and allow for her argument.

I interpreted the OP's words to mean that the foreign income exclusion absorbed all of his earned compensation -- thus no IRA contribution is allowed (any type of IRA).

My position was "supported" in a sense, by the OP not returning and adding to the discussion when Cindy argued that it was possible to have taxable compensation with no tax.

Of course, she is correct. There could be excess earned compensation (beyond the foreign income exclusion) that could permit an IRA contribution, even though other adjustments or deductions reduce taxable income to $0.

For those who have been lurking and reading with interest (or lack thereof <g>), I hope this ends the discussion.

Ira

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