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It is always more beneficial to plan ahead. A retirement plan is one of the things that every employee or business man should already be taking into consideration.

As a US expat, you must adhere to certain guidelines when it comes to choosing the most ideal retirement plan. The next, and perhaps the last, chapter of your life will be more enjoyable and meaningful if you avail of the retirement fund that fits you. Included here are some retirement concerns and IRS-approved retirement options and the related benefits they offer to your taxes.

Types of Retirement Funds

Here are some retirement accounts to which you can contribute your retirement funds. Each of these offer advantages and also some disadvantages, all depending on your income and tax rates, and your financial status.

Roth or Traditional IRA – for the employed
The Roth IRA (Individual Retirement Agreement) is ideal if you are currently employed. In this agreement, the money that you put in this retirement fund is taxable but when retirement comes and you need to withdraw certain amounts, these withdrawals will be non-taxable and free from penalties.

There is a bit of difference between the Roth IRA and the traditional, and it is about when you want your money to be taxed. In contrast to Roth IRA, the traditional IRA will deduct taxations on your future money, that is, the money that you withdraw during retirement period. How to choose better between the two will be discussed below.

Traditional 401(K) or Roth 401(K) Plans  – for the employed with sponsorship from employer –
Like the retirement plans available to the employed, these retirement plans also offer tax advantages, for present or future use.

The traditional 401(K) plan offers employees a choice of investment. All contributions and earnings from this plan will be tax-deferred. You will pay tax once you withdraw the contributions. The benefit here is employers will try to match a part of your 401(K) funds and these matching funds are also tax-deferred.

Roth 401(K) is like the traditional 401(K) plan except for one. The contributions from employees are not tax-deferred, but the interest, dividends, or capital gains are non-taxable.

Solo 401(K) – for the employer with no employees
If you are self-employed and no employee is under your jurisdiction, except your spouse and yourself, the Solo 401(K) is the ideal retirement plan.

The requirements are like all other 401(K) plans.  As an employer, you are given the privilege to save for retirement by designating certain amounts as your 401(K) funds and you don’t have to pay taxes for these amounts. Another benefit of the Solo 401(K) plan is the exemption of the employer to go through the intricacies of the ERISA (Employee Retirement Income Security Act of 1974) rules and procedures.

SEP (Simplified Employee Pension Individual Retirement Arrangement) IRA or Simple IRA – for employers and their employees
SEP is also adopted by business owners as a retirement plan both for themselves and their employees. In this set-up, employers and employees invest retirement funds like any IRAs.  Contributions to a SEP plan are deductible, which decreases the taxpayer’s income tax liability in his contribution year.

There are certain requirements the employers use to determine employee eligibility and these are: (1) have attained age 21; (2) have worked under the employer for three to five years; (3) have received at least $600 for the tax year.

If you are an employer who is not currently sponsoring any retirement plan for your employees and yourself, the SIMPLE (Savings Incentive Match Plan for Employees) IRA is the ideal retirement option. It is a type of employer-provided retirement plan that is also tax-deferred.

 

Types of Income and Tax Rates

Your choice of which of the mentioned plans is the best fit depends on your present income or earnings, and what you expect the status of these incomes or earning will be in the future.

For younger, low-income workers
If you think the Roth IRA is the ideal retirement plan for you, consider the tax bracket you have now and in the future, during your retirement years. If you expect that your tax rate in the future will be higher than your present rate, the Roth IRA is indeed the ideal choice.

So, Roth IRA is great for low-income workers who will gain much in the years to come through tax-free, compounded funds. There are also other wealthier individuals who choose Roth IRA to cut taxes during retirement years or those taxpayers who have assets to leave as heirs and wants them to be tax-free.

For older, high-earning individuals
The suggested retirement plan for an individual who has reached the maximum potential for earning and is under the highest tax rate at present will be better to go with the traditional IRA.

By opting for the traditional IRA, you get to enjoy tax breaks at present but will have to pay taxes for the retirement withdrawals in the future.

For the self-employed under part-time employment
The suggested retirement option for the self-employed is the Solo 401(K). To qualify, you have to be involved in non-full time work, which makes Solo 401(K) the best option for part-time workers. A full-time employee is one who works at least 1000 hours every year for an employer.

Aside from part-time workers, the Solo 401(K) is also great for any self-employed businesses like sole proprietorship, partnership, limited liability, C-Corporation, or S-corporation.

For small employers with employees
The ideal retirement plan is the SIMPLE IRA. It allows both employers and employee to set certain amounts as investments and allow these to grow for the retirement years.

For businessmen with employees
The SEP-IRA funds are ideal for employers who have employees working for his business and have reached the qualifications set by the employee. When withdrawals are taken after age 59 1/2, the SEP funds are taxed with ordinary income tax rates.

 

 

Other Considerations

Other things to consider are the sources of your funds: it can be earned (salary, wages, money earned through work or services) or unearned (interest, dividend, capital gain). US retirement plans require an individual to have earned income instead of the passive income.

As a US expat, your retirement plan has to include only the income subjected under US expat taxes. Meaning, all income excluded on your US tax return with FEIE (Foreign Earned Income Exclusion) cannot be used for retirement plans, except if your income exceeds FEIE. If your foreign country’s tax rate is equal or close to the US, file your US expat tax return with the Foreign Tax Credit instead of the FEIE. This will also allow you to qualify for a US retirement plan with zero tax due.