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I am in the same situation as you. I am an English teacher in Korea, so my income is all foreign. I had this discussion with a friend recently, and he said that I cannot contribute to an IRA. If I do, there are consequences. The following is a link that he sent me. It describes when you can contribute to an IRA. Also, it describes the consequences of contributing when you technically cannot. Additionally, it describes how to fix the problem if you contributed when you shouldn't have.

Specifically, this part will apply to me in the future:

"A contribution you made in violation of the above rules is called an “excess contribution.” A 6% excise tax applies when excess contributions are made to traditional or Roth IRAs. This tax is applied for each year that the contribution remains in the account.

Example: In 2008 and 2009 you incorrectly contributed $3000 per year to your Roth IRA. You will owe $180 tax for each year that each contribution remains in the account. It should have been paid with your tax return each year, but if that didn't happen you can file Form 5329 on its own (without amending your full tax return) for each prior year necessary. In this scenario, if you discovered your mistake (but did not correct it) in 2010, you would owe $180 for 2008, $360 for 2009, and another $360 for 2010."

To me, you brought up an excellent point! I can use profits from capital gains to count towards taxable US earnings. Or at least, I hope so! Because of this, I can at least lower my taxable "punishment" - the 6% tax. I maxed out my Roth at 5k, but I earned 2k in capital gains which I believe are US taxable income. Therefore, instead of paying 6% on 5000 = $300 per year, I can pay only 6% on 3000 = $180!!!

Hmm...I wonder if I could pay this excise tax every year rather than as a lump sum when I finally take a year or 2 off to stop funding it. That would be much easier than paying a huge lump sum at the end!

Anyways, you brought up an excellent point, and I hope that I at least helped answer your questions a little bit.

By the way, where are you working that your income is all foreign?

Fool On

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