July 23, 2014

IRA Considerations for Foreign Missionaries

Question:

As a missionary serving in Africa, I am treated as a 1099-MISC contractor by my U.S. mission agency. My self-employment earnings are approximately $60,000 and are considered 100% foreign-sourced income. Is it true that I may not be able to make contributions to my Traditional IRA or Roth IRA?

Answer:

Your retirement savings options greatly depend on how your tax return is filed. If you have no taxable compensation because 100% of your earned income qualifies for the foreign earned income exclusion (FEIE), you are ineligible to make IRA contributions. Any contributions made to your IRA during the period of your ineligibility are considered excess contributions. The excess contributions are subject to a 6 percent excise tax each year until the contribution is withdrawn per IRS requirements.

If you claim the Foreign Tax Credit (FTC) instead of the FEIE, you may qualify to make usual IRA contributions. You must meet the following requirements in order to make qualifying IRA contributions.
  • You must have taxable compensation.
  • You were not age 70½ by the end of the year (for a Traditional IRA).
  • Your modified adjusted gross income must be less than a specified amount (for a Roth IRA).
But if you are in a low-income-tax or no-income-tax country of service, you may not benefit by or qualify for the FTC. Other retirement options may need to be considered. Each missionary generally has a unique tax situation, and the missionary's tax preparer would best help determine if an IRA contribution should or should not be considered.

See IRS Publication 590 for more information, or click on this link for another great source on this topic.

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