IRA

People in the US are accustomed to saving for retirement by contributing to either a traditional or a Roth IRA. You may or may not have a viable option available in your local jurisdiction (some can retain their tax deferred treatment on US taxes thanks to tax treaties, but not all). If not, you may be able to contribute to an IRA. A Roth IRA also allows you to grow your money tax-free.

Can I contribute to an IRA?
You can contribute to a Traditional IRA if:

  1.  You received taxable compensation during the year, and
  2.  You were not over 70 ½ years old by the end of the year.

 

You can contribute to a Roth IRA if, in 2011:

  1.  You received taxable compensation during the year, and
  2.  Your modified Adjusted Gross Income is less than
  • $179,000 for married filing jointly or qualifying widow(er),
  • $122,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, or
  • $10,000 for married filing separately and you lived with your spouse at any time during the year.

For either account type, you will need taxable compensation. This can be achieved either by having US compensation income, or by not excluding all of your foreign earned income:

  1.  US compensation income would include :
  • Compensation earned in the United States (either before moving abroad or during stays in the US) and
  • Compensation received as an employee of the US government

2. If, after taking the Foreign Earned Income and Foreign Housing Exclusions, you have additional foreign income that is not excluded, the excess is taxable compensation (you may not, however, exclude an amount that is less than the allowed amount). If you pay taxes in a country with a tax rate greater than the US tax rate, you may simply chose not to exclude your foreign earned income and instead take advantage of the foreign tax credit to reduce your US tax liability.

What if I made contributions which were not allowed?
If you make a contribution in violation of the above rules, you will be subject to a 6 percent excise tax. This tax is a penalty on the amount of excess contribution you made to your account.
You should remove the excess contribution from your IRA prior to the due date (including extensions) of your tax return. You will avoid being penalized on the excess contribution. If you do not remove the excess contribution in time, you will be assessed the penalty, but you can remove it afterward at any time.
A 6% excise tax applies when excess contributions are made to traditional or Roth IRAs. Unlike many other IRS penalties, the excess contribution penalty persists every year until you remove the excess contribution. This tax is applied for each year that the contribution remains in the account.

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