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Author: Bauernaught One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 122627  
Subject: Re: Roth without US earned income Date: 6/25/2001 12:32 PM
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What you can do, if you desire, is elect to forego part of your foreign earned income exclusion, subject those earnings to taxation and use the not-excluded earnings as the basis for contributing to the IRA of your choice.

Ira,
What a coincidence - I was on a website for expatriates last week and read a similar thread to this one. The tax advisor (and author of a book about personal finance for Americans working overseas) replied to indicate that someone excluding their foreign income using Form 2555 wouldn't have taxable compensation and therefore couldn't fulfill the first requirement for making Roth IRA contributions.

I copied and pasted from your note above and asked her to verify your advice. Here is her reply:

"Thank you. It is a valid option and clever. You are not required to exclude all of your foreign income and this tactic gives you "taxable income", getting you past the first requirement for making contributions to an IRA. Many thanks,
[Name deleted to avoid a libel lawsuit]"

Please verify my thinking on this: If I work in the UK for all of 2001 and can exclude all of my income (which I can), and I choose not to exclude $2000 so I can contribute to my 2001 Roth IRA, I will not be subject to US tax because of my single standard deduction allowance? Regardless, I think your suggestion is worthwhile and I plan to follow your advice.

I had read the tax guidelines on the IRS website and thought I was eligible to contribute to a Roth IRA even though I was working overseas, but after reading the author's full reply, I thought I had made a mistake by doing so. A few weeks ago, I had sent a check for $1000 to fund half of my 2001 Roth IRA, and I was concerned about the hassle of having to take it back out (but fortunately, hadn't done anything about it yet). Your post was extremely helpful and made the difference between my having any kind of tax protected investments this year or not (as well as avoiding a big hassle). You are a star!! (or 3 stars, I guess!)

With much gratitude,
Bauernaught


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