Many US expats utilize Foreign Earned Income Exclusion (FEIE) to lower their US tax liability. As US citizens, we have the privilege to support their government with taxes even when we do not live in the US. The good news is that if you genuinely established a home abroad and have met certain criteria, you are able to exclude a healthy portion of your earned income from taxation.
One of the downsides of claiming FEIE is that you are not able to contribute to an IRA with your excluded income. IRS has made that clear. In fact, even if you still pay taxes after exclusion, you are required to add back your exclusion to determine whether you are eligible for Roth IRA contribution.
If your full income is excluded from taxation, you are not allowed to contribute to another tax-advantaged account with the same income. This is considered double dipping.
But how about a 401(k) or other types of employer sponsored retirement accounts? This is a unique situation that applies to expats who receive income from a US-based employer, whether you are a salary employee, independent contractor, or self-employed business owner.
Under the same double dipping concept, you’d think that contributing to a tax advantaged account with excluded income is also disallowed. However, this is where the rule becomes confusing. An IRS specialist had expressed the opinion that under Revenue Ruling 70-491, FEIE income may not be contributed to retirement plans formed under Internal Revenue Code 401. However, others have argued that this ruling from 1970 was before 401(k) plans were established so cannot be applied on those plans.
From my research, I have not encountered a publicly written opinion from the IRS that specifically disallows contributing to a 401(k) with income that later gets excluded.
(Disclaimer: I am not a tax professional. Consult your tax advisor before you make any decision.)
Claim FEIE or Contribute to 401(k)
Practically speaking, the US taxpayer has to make the judgment call in advance. 401(k) contributions are generally made with each paycheck. The custodian does not know whether the participant will qualify for and claim FEIE or not. So, unless the taxpayer retroactively asks for the return of excess contributions, the custodian has no way to check.
Even if the custodian has the procedure for the return of excess contributions, it may be difficult for the taxpayer to ask for the return of the full contribution due to FEIE. It’s conceivable that custodians and plan administrators are used to adjusting the occasional administration errors. For example, you over contributed $100 because payroll did not catch it. I doubt the process would be as simple or even possible for a participant to claim the full contribution as excess.
So let’s say you have not yet contributed to a 401(k) in 2017, and it’s likely you will qualify for FEIE in 2017, how do you decide whether to contribute or not? This depends on which camp you are in.
Camp YES YOU CAN
If you are in the camp that you should be able to contribute to a 401(k) with your excluded income, then you are in for a potential large tax benefit.
Since a pre-tax 401(k) contribution is already excluded from income, there is less controversy. In effect, you are not paying any taxes now, but will pay it when you make distributions at ordinary tax rates in retirement.
The alternative is not contributing to a 401(k), but investing the same amount in a taxable account. You still will not pay income tax in the current year due to FEIE. However, you will pay taxes on dividends, interest, and capital gains. Given that long-term capital gains and qualified dividends are taxed at a lower rate than 401(k) distributions, it takes more analysis to determine which one is better under your unique situation.
The greatest tax benefit comes from contributing to a Roth 401(k), if you believe the IRS allows this. A Roth 401(k) contribution is supposed to be taxed when you file your current year return. However, if you claim FEIE, you will not pay income tax on your income, or, needless to say, your Roth 401(k) contribution. Therefore your Roth 401(k) contribution could never get taxed!
It is hard for me to see that the IRS will allow this after reviewing the rules. If you are audited and the contribution is deemed disallowed, you will then be subject to paying back taxes. My guess is that in practice it’s easier to disallow claiming FEIE then to make changes to your 401(k) contribution, so you may end up paying income tax on your full income.
Camp NO YOU CANNOT
If you agree with the 1970 ruling that excluded income cannot be used to contribute to a 401(k at all, then you have some decisions to make. Do you claim FEIE or not? Is the 401(k) contribution beneficial enough to not claim FEIE?
The first thing you need to know is that FEIE is not the only way to decrease your US tax liability while living abroad. For those of you who live in countries where local tax rates are higher, it may be more beneficial to claim Foreign Tax Credit (FTC) on the local taxes you pay.
If you claim FTC, then you are able to bypass the decision of whether to contribute to a 401(k). However, if your resident country does not tax your US earnings, then it’s likely FTC does not apply to you.
So, if you are solidly in the situation of deciding whether to exclude income under FEIE or contribute to a 401(k) for long-term tax benefits, I created a quick tool to help you make this decision. Under each option, you will see the final amount in real dollars you may receive, and the annual real rate of return.
Before you begin, note that the tool assumes that you distribute the full amount after the specified number of years. Obviously that may not be what happens in real life. However, it’s easier to compare the tax consequences using the uniform approach.
Common Parameters
You need to make a few assumptions on the contribution and rate of return that will apply to your investments. Furthermore, you need to set an investment timeframe for comparison. I set it to be 30 years, which is the earliest I can take a lump sum from a 401(k) without penalty.
I chose 5% real return to represent a 100% equity portfolio. You are able to make your own assumption on the return. If you expect to invest in fixed income, then you will want to put in a share of return that will be taxed at ordinary tax rates.
Lastly, you need to make an assumption on the tax rate that will apply to your pre-tax 401(k) distribution.
Option 1: Take FEIE, No 401(k) contribution
The baseline is assuming you do claim FEIE, but invest the amount you would have contributed to a 401(k) in a taxable account. As explained earlier, you will have to pay taxes every year on the income, and on the gain when you sell the investment.
Option 2: Give up FEIE, Make a 401(k) contribution
If your employer offers a match, you may want to find out whether this “free money” is worth paying some taxes up front. This may be a good strategy if you don’t make a lot of money, but are able to contribute a large portion to a 401(k) because you don’t need the income to spend now.
You will need to know how much extra tax you may be paying due to not claiming FEIE. Unfortunately the calculation varies too widely for me to provide a reasonable estimate here for all users. However, you can easily find out the difference if you self-file using software like TurboTax.
In addition, you may also include the state tax and self-employment tax in this calculation to find out the true impact.
Option 3: Give up FEIE, Make a Roth 401(k) contribution
If your employer offers Roth 401(k) contributions, you may also want to know whether the forever tax-free treatment is worth paying some taxes up front. I assume that the employer match is still available, but will only be made on a pre-tax basis.
Now you know how the tool operates, let’s look at a couple of examples.
Example 1: Low income, high contribution
As mentioned, if you have a low US-based earned income but are able to contribute up to the max, the pre-tax 401(k) contribution may be able to eliminate most of your tax liability up front, and give you tax deferred growth on the investment.
Let’s say you only make $24,000 a year (or $2,000 a month). Making a full pre-tax employee contribution of $18,000 will cut your taxable income to only $6,000. Let’s assume you pay $1,000 extra in taxes overall for this income, which is about 16.7%.
In addition, your employer match is 100% up to 5% of your wage. So you also get $1,200 for free.
Look at Option 2 in the table below. If you contribute to a pre-tax 401(k), you will get a slightly lower rate of return due to the extra taxes you pay up front than claiming FEIE. However, at the end of the 30-year period, you actually will be able to take more out of your account. This is because you are paying your taxes out of your pocket now, not out of the investment account.
How about if you contribute to the Roth 401(k)? Let’s say you will pay $4,000 in taxes up front, which is also 16.7% of your $24,000 taxable income. You still get the $1,200 match from your employer on a pre-tax basis.
Look at Option 3 – your rate of return is actually slightly higher than claiming FEIE now and investing in a taxable account! This is because a Roth 401(k) gives you tax-free growth on your investment. At the end of 30 years, you will also have the most money after full distribution.
FEIE vs 401(k) – high income
Example 2: Self-employed with High Income
Let’s say you own a consulting business with no employees in the US and made $100k in profit in 2017. By setting up a solo 401(k), you are able to deduct up to 25% of the contribution made to your pre-tax account from profit, which is $25k.
In this case, you will contribute $25k to your 401(k) as the employer contribution, $18k as an employee contribution, and leave $57k as gross income to calculate tax.
I used an online calculator to quickly estimate the tax consequences, assuming married filing jointly. Under option 2, you may have to pay $4,500 extra in taxes, while under option 3, the upfront tax bill goes up to $7,000. These upfront taxes diminish the long-term return compared to simply claiming FEIE now. Investing in taxable accounts in a tax efficient way may give you higher returns than using tax advantaged accounts.
FEIE vs 401(k) – low income
Return assumptions make a difference
Note that what you invest in in a taxable account has huge consequences on the returns. This is because fixed income interest and non-qualified dividends are taxed at the ordinary tax rate.
You will see that for the previous two examples, if you set the % return coming from interest to be even just 20%, using the 401(k) becomes much more attractive, even if you have to pay taxes up front.
So before you look at whether to use a taxable or tax-advantaged account, evaluate your risk tolerance and how much you are willing and able to invest in more volatile assets like stocks with a potentially lower tax burden.
FEIE vs 401(k) – change return
Download the tool here
In summary, claiming FEIE and / or contributing in 401(k) is a complicated issue. Consult a tax professional that specializes in expat tax planning, and don’t rely on your own interpretation. However, if you like analysis, here’s the tool I created. You are welcome to download it and play around with assumptions.
I'm Hui-chin Chen, a globetrotter & certified financial planner helping you manage your finances from afar and on the go.
Hui-Chin, thanks for this article. I’m starting a new overseas job next week and looking at my 401k options. Any new information come to light over Roth 401ks since this was written?
Hi Kevin, no new info that I know of. I think what I wrote still applies.
Hi Hui-Chin, just following up on my previous comment and wanted to share my thoughts/research. It doesn’t seem that contributing to a regular 401k is a good idea with income that would have otherwise been excluded with the FEIE. W2 Box 1 income has already been reduced by 401k contributions before the FEIE is ever taken into account, so it’s not actually excluded by the FEIE. I can see zero controversy as to whether or not this would be allowed. What that does though, is turn what would have been tax-free income into tax-deferred income (if income is below the FEIE exclusion limit). That seems like a terrible idea for taxpayers but great for the IRS! My company offers the Roth 401k, and a CPA has given me the green light on contributing to the Roth 401k even after excluding the income using the FEIE. I agree, this seems to be good to be true. To me, it appears that, as written, and since this is not specifically addressed or disallowed, then contributing to a Roth 401k with income that is excluded from taxation with the FEIE is allowed. I guess I’m in the Camp YES YOU CAN 🙂
Hi Kevin,
You might want to check out this article that was linked in my post. The author actually got a definite NO from correspondence with the IRS. Unfortunately, matters like this are never final until there is a ruling in tax court. I think the reason why this issue has not gotten a court ruling is because the IRS does not have a good way to identify this “violation” unless they specifically audit this, since Roth 401(k) contribution does not show on tax return. If no one was ever “caught”, then it won’t get a challenge in court. Personally I would not recommend contributing to Roth 401(k) with excluded income, but if you get a definite answer from the authority that it is legit, please report here!
Hi Hui-Chin, I have solo 401k setup for my S-corp right now. I can contribute when I am in US;
– up to $25,000 as Salary Deferral from my W-2
– and also pass-tru income profit sharing contribution up to 25% of W-2 earnings
I am planning to live overseas next year. Can I still invest into my solo 401k if I use “foreign earned income exclusion” option?
Hi Lewis,
Yes you can. Your final FEIE deduction amount is determined after adjusting for retirement contribution deduction. However, it’s another question whether you should turn current year tax-free income (if all of it under max FEIE you can take) into tax-deferred income. It depends on your timeframe (how many years of tax deferral) and the type of investments (more capital gains vs. income) you make. That’s why I created the spreadsheet to help people compare different strategies. Hope this helps!
Hui-Chin, thanks for writing this article. I’m moving to Europe in a couple months and have done so much research on this issue and haven’t found a clear answer. I would love to contribute to and max out my Roth 401k if this can be done with FEIE income, but not if it is disallowed and I have to pay huge penalties on it in the future. Have you found out any update since your last post?
If it’s not allowed, would pre-tax 401k contributions be allowed? I know you’re deferring taxes on income that would have been tax-free anyways, but the tax-free gains and dividends might make it worth it. Especially for those of us who plan to retire in a very low tax bracket. Let me know what you think!
Hi MJ,
Thanks for the comment. There isn’t update to the law that I know of since I wrote the article. My personal take is, if it’s too good to be true, then it probably is. I DO NOT suggest my clients to do this, because I can’t imagine IRS intentionally allows contributing to Roth 401(k) using excluded income. The reason it hasn’t become a bigger deal is probably because there is not an automatic way to catch this in tax filing process. However, Roth 401(k) contribution is reported on W-2. So if you are an employee, the info is there. It’s a matter of whether IRS wants to scrutinize it.
On the pre-tax side, the 401(k) contribution is considered made before calculating income available for exclusion, so I think it is allowed. The reason I created the calculator is exactly so people can decide whether tax-deferred gains and dividends might be worth it based on their various income scenarios.
Hope this help!
Right now I use the FEIE for the first 105k, and then remainder 45k is given to myself as distributions (s-corp). How should you squeeze a 401k in there, and which type?
Hi Hui-Chin,
Thanks for the helpful article, I am also wondering about this situation, and hoping you can help me get my head around some of the issues… My situation:
– US citizen living abroad permanently, employed full-time and paid directly by a US employer.
– For the last 8 years I have been paying up to the max of the traditional 401k limit in pre-tax contributions from my US paycheck into my employer’s 401k plan, with company match, which goes into a Target Date fund at Vanguard.
– I earn a bit above the FEIE which I claim but after other allowances such as housing and the 401k paycheck deductions I am about even and usually owe no tax or something very little.
– Employer gives tax-equalization so I don’t pay any foreign taxes myself, the employer pays them directly, but then that benefit is added to my US paycheck for tax purposes bumping my gross salary.
Am I making a big mistake contributing to this traditional 401K?
When it comes time to withdraw funds would they be subject to standard income tax on the whole amount, i.e. contributions + gains, even if my tax bracket is lower then?
Would I be better not paying into a traditional 401k and instead paying into a taxable account where eventually I’d be taxed only on the gains at long-term capital gains rates?
I don’t know if my employer offers a Roth 401k, but would that be better?
It’s very confusing….
You may consider making pre-tax solo-401(k) contribution since you do have $45k taxed at the higher rate now. Employer contribution is maxed out at 25% of compensation, so for you it’ll be over $25k. You can also pay yourself more so you can contribute pre-tax as employee. Plus standard deduction, it’s likely you can shelter the 45k from tax.
https://www.irs.gov/retirement-plans/one-participant-401k-plans
It sounds like if you don’t make pre-tax contribution, the amount may become taxable currently at the higher bracket given your description, so you might want to do some tax projection. It’s possible that Roth 401(k) is best if you have earnings above FEIE but after other deductions you still pay zero tax. Also if your company gives you a match, make sure you still contribute enough to get it.
Hi,
I’m a US citizen living in Europe, working for a US company who I used to be an Employee of for 12 years (and amassed a 401K), but then switched to being an Independent Contractor for the same company 2 years ago and have claimed FEIE since. I do NOT make more than the FEIE threshold. It seems I can not keep contributing to my 401K anymore. So I am trying to find a place to put my savings, rather than just my Bank’s savings account – I want to put my savings into SOME kind of Retirement Account; IRA, 401K someplace?! – I don’t know where to put my savings; but I want to protect it so it’s STRICTLY for Retirement and can’t be reached until then without Penalty. Thanks for any advice!
Hi Dave, not sure if you are a statutory employee or not. If you are filing Schedule C, you can check out this post.
Hi Hui-Chin Chen,
Thank you for this blog post and tool kit! I am making well below the FEIE allowance, and work for an American company with a 401K and match. In 2020, I have US taxed income, but I’ve recently moved to Guyana where I will be subject to a 33.7% tax rate. It seems unsustainable to pay tax here and not file an FEIE exclusion, however I would like to benefit from my employer’s plan in 2021… is this article saying that would not be possible without a heavy penalty fee? What about contributing to my existing IRAs? I have been making contributions to those along with various 401Ks while living abroad for the better part of decade….
Hi Alex, if you will be paying higher tax rate in another country, you may want to consider taking Foreign Tax Credit. That way you can contribute to 401(k) without considering FEIE implication, since you’ll be reporting income as if you are working in the US, and just get a credit against the tax you’ve already paid overseas.
Hi Hui-Chin,
Thank you for addressing what I have been trying to figure out. I am a missionary in Africa, full time, paid by my US employer in TN ($21,000/yr), I take the FEIE and just began taking annuity distributions. Once I pay the tax on these distributions I am thinking I am still NOT eligible to put the distributions into a Roth. Yes? Is it possible to take the FEIE on only some of my earnings, enough to make a Roth contribution possible? Or is my income low enough to just pay the income taxes to make Roth contributions? Not sure what to do. Thank you so much! Alan
Hi Alan, FEIE calculation applies to the entire earned income, so if you exclude the whole thing you cannot contribute to Roth. It’s possible not taking FEIE is better, depending on your overall income and life circumstances. However, once you revoke FEIE, you cannot elect it again for another five years, so you need to be certain of your longer term situation. Annuity is not earned income; however, some part of it may not be taxable if it’s return of your contributions.
Great article, have a specific situation that we would like to get clarified. We are moving in July and understand we can do a prorated FEIE for half of the year (after getting an extension to file). However, we have already contributed a significant portion of our income to a 457 and solo 401k. After anticipating our income, it will fall about $15,000 above the allowable FEIE amount. This is significantly less than we have already contributed to the pre-tax accounts. Does the automatically exclude us from taking the FEIE for this year or is there some way to separate the time prior to moving and thus any pre-tax contributions during that time? Are we better off just waiting for next tax year to use the FEIE? Hope I explained this well and thank you for clarifying.
Hi Beau, not sure I understand completely. The pre-tax contribution to 401(k) and 457 will have reduced your W-2 taxable wages already. When you file taxes next year, regardless how much earned income you had from all sources, you can take FEIE that you are eligible for based on the physical presence test.
Hello, thank you for the awesome article, it was informative and addressed the issue I’ve been trying to research. If I understood correctly I have the following options if I wish to work for a US company while living abroad:
Income 120k
Option 1. Take FEIE for 2021 tax year (108k) which leaves me with 12k US income that I can contribute to a Roth 401k (without risk of penalty) .
Option 2. Contribute to company 401k with pre-tax dollars to max allowable (19.5k) and claim FEIE for the remaining 100.5k.
Option 3. Contribute 19.5k to Roth 401k and claim FEIE for the rest (most likely not allowed and carries significant risk).
Bonus scenario: If I claim FEIE for 108k out of 120k, is the last 12k US income qualified to be contributed to an IRA?
Are all of these options viable? Thank you for your time.
– Silom
Hi Hui-Chin, thanks for this resource!
I’m a US citizen who’s been working outside of the US for about 5 months now. This was originally planned to be temporary, but I’m extending my stay to at least 1 full year. Since my work arrangement was originally temporary, I already maxed out my traditional 401k and Roth IRA for the year, and made some HSA contributions (employed by a US company).
Am I right in interpreting that if I want to use the FEIE, I can’t claim the income portion in which I already contributed to the 401k, Roth IRA and HSA? Is it possible to only claim part of my income as FEIE to avoid penalties for having made contributions? I also have some US based rental income (~15k/yr) which I believe can’t be claimed as FEIE so that would be part of the unclaimed part.
Not sure if I’m making any sense, but thanks so much for this resource!
Hi Maria, you’ll file using your W-2. The 401(k) and HSA deduction will be reflected already so your’ll report what shows on your W-2, then calculate the FEIE you are eligible for as a deduction against the W-2 income. If after FEIE your AGI is zero, then you don’t have earned income to contribute to Roth IRA. You may be able to recharacterize it as 2022 contribution with your custodian if you will be eligible.
Hi Silom, yes all the options you listed. People do option 3 because you may only get caught when audited, and even then it’s unclear whether IRS specifically audit that area. However applying the logic of the law, option 3 shouldn’t be allowed.
Wow, what a fantastic post! There are a ton of interesting edge cases here as well, for example someone making $120K and putting $12K in the Roth 401K as outlined by the previous commenter.
My question applies to Roth conversions. If someone converted ~$15K from a traditional IRA to a Roth IRA while claiming the FEIE, what would happen? Would it make a difference if income were $50K vs $120K for that tax year?
We have income in excess of our FEIE. We currently contribute to our company 401ROTH but still have some U.S. taxes to pay. If we contributed to a 401K with pre-tax dollars, instead of the ROTH 401, then use the FEIE this should lower our overall tax basis and subsequent taxes for the year, correct? We would still pay taxes on those 401K dollars at some point in the future, but contributing now would lower our tax basis, correct? For example, I earn $130,000 per year, I contribute $22,000 (over age 50) to my 401K (Pre-tax), then use the FEIE to exclude the remaining $108,000.
Again, it’s the stacking process I’m wondering about: Pre-tax 401K, Use FEIE, in this order?
My wife and I are employees at an international school in Singapore. Our school offers to American employees a 401ROTH. My question is as follows
Can we contribute money to the ROTH401 if we have income ABOVE the FEIE and use Foreign tax credits to offset taxes in America. We pay taxes in Singapore but not the United States. In short, we have taxable income above the FEIE but offset this with the foreign tax credits. Given we are paying taxes here in Singapore Foreign Tax credits can we still contribute to the ROTH401?
Hi Derek, Roth conversion is reported as IRA distribution (Line 4 on 1040). It’s not earned income so doesn’t impact FEIE eligibility. IRA distribution is ordinary income that will be taxed at the higher marginal tax rate. FEIE always reduces the income at the lower bracket first.
Hi Jeff, yes, pre-tax contribution happens before you apply FEIE to the rest. On W-2, taxable wages already exclude pre-tax contribution so FEIE applies to that amount.
Hi Jeff, yes that is doable. Whether you pay Singapore tax on the income above FEIE is irrelevant to whether you can contribute to Roth 401k. However, yes, you can further reduce US tax if you pay foreign tax on the income above FEIE limit.
Hi,
I have been living in Europe since September of 2020. I began to earn money in January 2021 from working as an independent contractor for a US company. My total income for 2021 is under the FEIE limit. I have been contributing as employer and employee to a traditional i401k, as well as maxed out my contributions to my Roth IRA.
I will have to pay 2021 taxes in my European host country, and due to a relatively high tax rate here I believe it will benefit me to claim the Foreign Tax Credit as opposed to the FEIE on my 2021 US taxes (does it sounds like this to you?)
My question is, if I do so, was I incorrect in contributing to either my i401k or my Roth IRA? Based on what you’ve said previously, it sounds like the i401k tax-deferred contributions may be ok, but the Roth IRA contributions are not? Or are they both fine if I am claiming the Foreign Tax Credit and not the FEIE?
Hi! Hui-Chin Chen,
What do you think about contributing the full Roth 401k limit of $20,500. Then doing a mega back door Roth IRA conversion and contributing the total allowed $61,000.
But still claiming the FEIE..?
If you have $61,000 income above FEIE, you can max both Roth and after-tax contribution to 401(k). My stance is that you should only be able to contribute after-tax if you actually have taxable earnings. Whether IRS will catch you doing it is another matter. Conversion or not shouldn’t impact the tax treatment of contribution.
Hi Malia, it’s common for US citizens in some European countries to claim FTC instead of FEIE because of higher tax rates there. If you claim FTC, you can calculate all US retirement contributions the same way as you were in the US. FTC is applied after all the US tax calculation is done on 1040 so you should be fine. If you claim FEIE then you may not be able to make Roth IRA contribution if gross income is under FEIE. Another thing to double check is whether you need to report investment income from US retirement accounts in your resident country annually since not all tax treaties recognize all the US retirement plans.
Hui-Chin Chen,
Thank you a bunch for your willingness to reply to a question I had regarding Claiming the FEIE and contributing to a 401K (ROTH). I wanted to provide some additional rationale our school is using (along with the CPA and investment firm (RPG-U.S. based) to justify employees being allowed to use the FEIE and ROTH and to contribute FEIE funds to a ROTH (essentially, the “best” of both worlds). I would so appreciate your perspective on this.
Summary of rationale:
1) Solo 401K plans are different than EMPLOYEE sponsored plans when it comes to contributing to 401 plans.
2) In Solo 401K plans a person CAN NOT contribute excluded money from the FEIE to a retirement plan like a 401
3) Employee plans; however, DO allow a person to contribute money from FEIE to a retirement plan as they define “compensation” used for retirement to Income excluded with the FEIE. Because an employee plan is an employee plan and not a solo plan it is taxed differently.
Rational from the CPA:
Solo 401k plans which, as I noted earlier, are in fact tested against the net earned income after FEIE.
However, the IRS code very specifically says “without regard to… Section 911…” for an employer plan, so the FEIE does not apply. Remember the actual IRS regulation says this:
Department of the Treasury Regulation 1.415-2(d)(2)(i) requires the following items to be included in the definition of compensation when considering what can be invested in an employer-provided retirement plan [such as a 401k]:
• All wages
• Salaries
• Other amounts received that are includible in the employee’s gross income, including overtime
• Other items include commissions, fees for professional services, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a non-accountable plan as described in Treas. Reg. Section 1.62-2(c)
• Compensation also includes foreign earned income without regard to the exclusions under IRC sections 911, 931 and 933
I’d be curious if you could share your perspective or if you know of other schools/organizations allowing employees to use excluded income to contribute to a ROTH IRA.
What a great article and still getting attention in 2022. I have a similar question with a twist. I own my own single member LLC taxes as S Corp. I pay myself 60K in w2 wages as employee and get 200K as dividends/profit sharing as employer. My wife is a W2 making 200K. We file jointly. If we move abroad, can I contribute to my solo roth 401K as employee?
Jeff, in practice, I’ve seen people contribute to Roth 401(k) and claim FEIE afterwards. That is the sequence event that would happen since 401(k) contributions happen per paycheck before you claim FEIE on the tax return next year. Without being audited, that can happen for years without any consequences. Your school doesn’t care whether you contribute to Roth 401(k) or not since claiming FEIE is a choice. If the CPA you cited files your tax return and will represent you if there is a dispute from the IRS, you can definitely go ahead with putting tax-free income into tax-free account. When section 415 was first written, Roth 401(k) didn’t exist yet, so it’s likely a case of unintended loop hole. There were also amendments to Sec 415 along the way. I’m not a lawyer or CPA so you should take the advice from someone who actually represents you.
Johan, you should not contribute to solo-Roth 401(k) with excluded income. Another commenter on this thread had provided another CPA’s interpretation on this. You can always increase your W-2 wage above FEIE to the extend of your Roth 401(k) contribution. However, you’ll pay more SE tax.