Expat Retirement Accounts: Can You Still Contribute to IRA and 401(k)?
Quick answer
An IRA contribution requires taxable compensation, and income excluded on Form 2555 does not count as compensation. So an expat who excludes every dollar they earn has $0 of eligible compensation and cannot fund a traditional or Roth IRA at all. Earn more than the exclusion and the excess does count, easily covering the 2026 IRA limit of $7,500. For everyone else the fix is to claim the Foreign Tax Credit instead of the exclusion, which leaves your income in AGI and usually wipes out the US tax anyway in a higher-tax country. The catch: revoking the exclusion locks you out of it for five years.
The Rule Almost Nobody Is Told
An IRA contribution requires taxable compensation — wages, salary or net self-employment earnings that appear in your gross income. That requirement lives in IRC §219(f)(1), and IRS Publication 590-A states the consequence plainly: amounts you exclude under the foreign earned income exclusion or the foreign housing exclusion do not count as compensation for IRA purposes.
The exclusion is indexed each year — it was $130,000 per qualifying person for 2025, and the current figure is in the Form 2555 instructions. That number is large enough that most expats exclude their entire salary. And the moment they do, their IRA eligibility goes to zero.
This is not a reduction or a phase-out. It is a cliff, and it is invisible: nothing on Form 2555 warns you, and most custodians will happily accept the contribution. You discover it later, as an excess contribution carrying a 6% excise tax for every year it stays in the account.
Three Cases, Three Different Answers
Case 1 — You exclude all of your income. Salary $58,000, all of it excluded. Compensation for IRA purposes: $0. No traditional IRA, no Roth IRA, no spousal IRA funded from that salary. Nothing.
Case 2 — You earn more than the exclusion. Salary $200,000, roughly $130,000 excluded, about $70,000 left in gross income. That remainder is compensation, and $70,000 comfortably covers the 2026 IRA limit of $7,500 (or $8,600 if you are 50 or older). High-earning expats are usually fine.
Case 3 — You use the Foreign Tax Credit instead. The credit does not exclude anything. Your full salary stays in gross income, all of it is compensation, and you have full IRA room. You then offset the US tax with the foreign tax you already paid.
Case 3 is the one most expats should look at hardest, because in a country with higher income tax than the United States the credit typically eliminates the US liability anyway — and unused credits carry forward for ten years under §904(c), with a one-year carryback.
A Worked Example
Anna is a US citizen teaching in Madrid on a local contract. She earns $58,000 and has no US-source income.
With the exclusion (Form 2555):
- Foreign earned income excluded: $58,000
- Adjusted gross income: $0
- US federal income tax: $0
- Compensation available for an IRA: $0
- Retirement contribution she can make: nothing
With the Foreign Tax Credit (Form 1116) instead:
- Foreign earned income in AGI: $58,000
- Less the 2026 single standard deduction of $16,100 → taxable income $41,900
- US tax before credits: $12,400 at 10% ($1,240) plus $29,500 at 12% ($3,540) = $4,780
- Spanish income tax on that salary comfortably exceeds $4,780, so the credit reduces her US bill to $0 and she carries the remainder forward
- Compensation available for an IRA: $58,000
- Retirement contribution she can make: $7,500 into a Roth IRA
Same tax bill — zero, both ways — but one route lets her save $7,500 a year in a Roth and the other does not. Over twenty years at 7%, that difference is worth more than $300,000. Run your own horizon through the retirement calculator before assuming the exclusion is the obvious choice.
Exclusion vs. Credit, for a Retirement Saver
| Foreign Earned Income Exclusion | Foreign Tax Credit | |
|---|---|---|
| Form | 2555 | 1116 |
| Effect on income | Removes it from gross income | Leaves it in; offsets the tax |
| Counts as IRA compensation | No | Yes |
| Best when | Local tax is low or zero (Gulf states, Singapore, Hong Kong) | Local tax exceeds US tax (most of Western Europe, Japan, Australia, Canada) |
| Unused benefit | Lost | Carries forward 10 years, back 1 |
| Refundable child tax credit | Not available in a year you file Form 2555 | Available |
| Switching back | Revocation locks you out for 5 years without IRS consent (§911(e)(2)) | No lock |
That five-year lock is the reason this is a planning decision rather than a filing decision. Run both calculations before you choose, not after.
The Roth Trap: The Exclusion Is Added Back
Some expats reason that excluding $130,000 of income will bring them under the Roth phase-out. It does not. For Roth eligibility, MAGI is figured without regard to §911 — the exclusion is added straight back. An expat earning $260,000 who excludes $130,000 still has $260,000 of MAGI for this purpose.
The 2026 Roth phase-outs are $153,000–$168,000 for single filers and $242,000–$252,000 for married filing jointly (Notice 2025-67). Above the top of the band, direct Roth contributions are off the table regardless of what Form 2555 says.
The same add-back applies to traditional IRA deductibility if you are covered by a workplace plan, where the 2026 phase-outs are $81,000–$91,000 single and $129,000–$149,000 joint, or $242,000–$252,000 if you are not covered but your spouse is.
For expats above those bands the answer is usually a backdoor Roth — a non-deductible traditional IRA contribution converted to Roth — which has no income limit. It still needs compensation to work, so Case 1 above still blocks it. The Roth conversion calculator will show what the conversion costs once the pro-rata rule is applied to any existing pre-tax IRA balances.
What About the 401(k)?
A 401(k) belongs to an employer, not to you, so the question is who signs your paycheque.
- US employer, foreign posting. You are usually still on US payroll and still in the plan. The 2026 elective deferral limit is $24,500, plus $8,000 at 50 or older, or $11,250 at ages 60 to 63. Total additions from all sources are capped at $72,000 under §415(c).
- Local employment by a foreign company. There is no US plan to join. Your employer's local pension may be excellent, but it is not a 401(k) and generally gets no US tax deferral.
- Self-employed abroad. A solo 401(k) is available, but the same compensation problem applies: the deferral must come from net earnings that are not excluded on Form 2555. Exclude everything and you can defer nothing.
Self-employed expats have a second issue. US citizens abroad owe self-employment tax on net earnings unless a totalization agreement between the United States and their country of residence assigns coverage to the local system. The Social Security Administration maintains the list of agreements — about thirty countries. Without one, you pay into both systems.
What This Doesn't Cover
Four things that catch expat savers, none of which an IRA article usually mentions:
Foreign funds are radioactive. Non-US mutual funds, ETFs and many pooled investment wrappers are PFICs under §1297, taxed under a punitive regime with an annual Form 8621. A UK ISA or an Australian managed fund can be a perfectly sensible local product and a US tax disaster. Hold US-domiciled funds where you can.
Foreign pensions usually get no US deferral. Growth inside a foreign employer pension is generally taxable to a US person year by year unless a tax treaty says otherwise. The US–UK treaty does provide for pension recognition; most treaties do not go that far. Check the specific treaty before assuming your local plan is tax-deferred.
Reporting is separate from taxes. If your foreign accounts together exceeded $10,000 at any point in the year, you file an FBAR (FinCEN Form 114) — separately from your tax return. FATCA Form 8938 has higher thresholds for taxpayers living abroad: $200,000 single or $400,000 joint at year end, or $300,000 / $600,000 at any point. Penalties for missing these dwarf the tax at stake.
HSAs generally stop. An HSA contribution requires enrolment in a qualifying high-deductible health plan. A national health system or a local employer scheme almost never qualifies, so the 2026 limits of $4,400 self-only and $8,750 family are usually unavailable to you. Existing balances stay invested and can still be spent on qualified expenses.
Where to Start
Work the decisions in this order:
- Compare the exclusion and the credit on your actual numbers, including the IRA room each one leaves you. Do this before your first expat filing if you can — the five-year revocation lock makes it expensive to change your mind. The tax bracket explainer shows where your income lands in the 2026 bands once the standard deduction is applied, which is the figure the credit has to offset.
- Confirm you have non-excluded compensation before contributing a dollar to any IRA.
- Keep a US brokerage account open and keep a US address on file with the custodian. Many brokers restrict or close accounts once a foreign address appears, and re-opening from abroad is far harder than keeping one.
- Buy only US-domiciled funds to stay clear of the PFIC rules.
- File the FBAR regardless of whether you owe any tax.
FAQ
Q: I claimed the exclusion and contributed to a Roth anyway. What happens now? A: It is an excess contribution, and it carries a 6% excise tax for every year it remains in the account — this is cumulative, so an old mistake compounds. The cure is to withdraw the contribution plus the net income attributable to it, or recharacterise it, by the extended filing deadline of 15 October for that tax year. Do it within the window and you owe no excise tax at all. If the contribution is from an earlier year, the withdrawal is still the fix, but you file Form 5329 and pay the 6% for each year it sat there.
Q: My spouse is a non-US citizen and doesn't work. Can I fund a spousal IRA for them? A: Only if you file a joint US return, which means electing under §6013(g) to treat your non-resident spouse as a US resident — and that election puts their worldwide income into the US tax net permanently until revoked. It also gives them US filing and FBAR obligations. For a spouse with meaningful assets or income abroad, the cost of that election usually far exceeds the value of a $7,500 IRA contribution. Model it properly before electing.
Q: Does foreign housing exclusion income count for an IRA? A: No. The foreign housing exclusion and the foreign housing deduction are treated the same way as the earned income exclusion — excluded amounts are not compensation for IRA purposes. If you are stacking both exclusions, subtract both before deciding how much IRA room you have. Only what remains in gross income counts.
Q: I'm moving back to the US mid-year. Does that change anything? A: Yes, usually for the better. The exclusion is prorated by the number of qualifying days abroad, so a partial year abroad leaves a larger slice of your salary in gross income — which is compensation, and which restores IRA eligibility. A repatriation year is also frequently a low-income year by US standards, which makes it one of the best years you will have for a Roth conversion on any pre-tax balances you built up before you left.