How to contribute to Roth IRA from Germany

71 posts in this topic

Hi,

 

I am looking for a tax advisor for Americans who live in Germany. Or if you have ideas for my questions below, please help!

 

In 2009, I only worked in Germany, so I have no earned income in the US. Nonetheless, I would like to convert my traditional IRA to a Roth, if possible, as well as contribute to a Roth IRA.

 

I think this might be possible if I declare that, say, $5000 of my income was "earned" while I was vacationing in the US, so that I can contribute to a Roth IRA.

 

If anyone has done this, please share your experience!

 

If anyone knows a tax advisor who can help with this, let me know! I am fairly competent with TurboTax and have always done my own taxes in both the US and in Germany, so I am just looking for advice, not necessarily for someone to do my taxes.

 

Also, about how much would it be to ask someone this kind of question?

 

Thanks everyone for your help!

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Talk to the institution managing your IRA. As for contributions to a new retirement account, set it up where it does you the most tax good. Much would depend on how long you will be in Germany. Contributing to a Roth seems a bit useless when it gives you no US tax advantage on foreign income taxed in Germany.

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Any US IRA is tax advantaged (or at least tax deferred) on the US side because interest, cap gains and dividends are earned inside of the account. The Roth has no tax advantage in the US in the year of contribution but rather when distributions are taken from it tax free (IIRC, no earlier than at the age of 59 1/2 and no later than 70). The real issues faced by a US citizen resident in Germany when deciding whether to go Roth or traditional is whether or not they have any US tax liability in the year of contribution and, much more significant, whether or not they will be resident somewhere other than the US when they take distributions. US IRA disrtibutions, Roth or traditional, are taxable in Germany.

 

You can contribute to an IRA based upon income earned from a job outside of the US. Back when Roth began, I converted a traditional IRA to a Roth and paid taxes on the conversion, but you need to check what the current rules are on the taxation of the conversion.

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I am still in the US and recently asked my IRA holder (Vanguard) the same question. They said that non-residents cannot contribute more money to US retirement account. They said it might be OK if I maintain a US address, but I'm not sure of the legality of this ...

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I'm glad that someone brought up this topic - I am moving to Germany and I am trying to figure out how to keep my IRA retirement contributions going.

 

I have a 401K and an IRA. In 2010, the US govt is removing income caps for rolling IRAs into Roth IRAs. I was planning to roll the IRA to a Roth and roll the 401K to an IRA and then roll the IRA to a Roth and just pay the taxes in 2011 and 2012. I had no idea that this was not legal if you are not a US resident!

 

I was also planning to out 5K per year in a Roth IRA - I can use my parent's address in the US, but it will be obvious that I am abroad from my tax returns. And the whole idea that IRA or Roth distributions can be taxed in Germany, thats crazy - I'll pack it up and head back to the US before I pay taxes a second time to the German govt on the money.

 

AmericaninBerlin, you may have to bite the bullet and pay a financial advisor to help you out with this one. This is very complicated and you don't want to act on wrong advice (IRS will come after you with fines, fees, and penalities). When you do find out, please share that advice.

 

I'm in a somewhat similar situation.

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And the whole idea that IRA or Roth distributions can be taxed in Germany, thats crazy -

 

I would hazzard a guess that they would also be taxed in many other countries as well. And vica-versa.

 

There are dual taxation agreements between many countries - the snags arise when country "A" has a "tax-free" scheme which does not match to the schemes in country "B".

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What Mike Kanu posted is more accurate than what I posted, but what Vanguard told him isn't completely accurate. Here is the official IRS position on contributions to a US IRA- basically, if you have 5K that doesn't fall under tax exclusions you can contribute even if you live overseas.

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Exactly, Conquistador! But is it ok to just declare 5K of my income in the US, pay taxes on that (or not, since it is too low), and then declare that I earned my real salary - 5K in Germany?

 

And just like Hamburglar, I have a small IRA that I'd like to rollover to Roth.

 

I don't mind paying for some good advice--but from whom?

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Concerning the IRA and the Roth, talk to your institution handling them. It is free advice and they are usually pretty good on knowing the ins and outs of it. To get a little tricky with the system, then talk to a German based US accountant and tax specialist. Whatever you do, DO NOT claim residence in the US for one financial instrument and then another for the IRS. I am not talking postal address (home of permanent record) for credit cards, voting, etc , but residence for income purposes. If you are going to be a short termer abroad, then continue your planning accordingly, however if you are going to be a long termer, setting up a retirement account in Germany does have other advantages. I have retirement accounts in the US and in Germany. I wanted to continue contributions to the US side, but as a long termer that became just too much of a hassle and without matching 401k funds not worth it.

 

Basically, your individualized plan depends entirely on your current and future living situation. You also have to take into account your social security contributions and the fact that while overseas you are probably not contributing to that either. I recently got my benefits update letter and the lack of contributions for the past 12 years really did a number on my payout. However, I now have the German side to supplement as well as my retirement funds on both sides of the pond. Fortunately for me, I wisely used my IRA in the first time homeowner scheme which worked out to my total advantage. The Euro-Dollar exchange rate reversal also worked to my advantage at the time!

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If you did not earn the money in the US, it would be both illegal and foolish to claim that you did, so just don't do it. How can you claim you earned 5K working a job in the US when no one filed a W-2 for you or gave you a 1099?

 

Although what eurovol posted in post 12 is generally good advice, as the above Vanguard example shows you cannot rely solely on an IRA custodian for personal tax advice or even accurate advice as to your eligibility as a nonreident to make contributions to an IRA.

 

There is a US CPA named Mike Summers who advertises here on TT. I am not a client of his, but I imagine that he would be well-placed to definitively answer your questions regarding US IRAs for nonresidents.

 

One other thing- americaninberlin, how old are you? Once you reach a certain age, it may not make sense to even contribute to an IRA. Eurovol, for example, is 48, so he's already passed that point. Someone who started at 18, or even 23, probably doesn't need to contribute additional funds once they have hit 40.

 

Here is a link to IRS Publication 590, which covers IRAs.

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Thought the IRA was out of business?!

 

Strange, and I never thought the American funding of the IRA had been so well organised. I suppose you even get tax relief for funding an Irish "political" group :D

 

Seriously, good luck sorting this out. I have enough issues with my tax return here in Germany and Ernst and Young are my advisors.

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I was planning to contribute to a Roth IRA with savings I have that were built on USA income. Does anyone know if this is legal? It would not be German money. I wonder if I can still move forward with my plans to convert my IRAs to Roth IRAs this year.

 

I am reading all of this retirement talk and I am in a bit of a situation - I don't really know where I want to retire. I may retire in the US, Germany, Tahiti, or my own personal island in the South Pacific - retirement is 40 years away for me. I am in my 20s/30s, so I need to save something, but not knowing exactly where I want to retire means that selecting an investment vehicle (IRA, Roth, 401K, etc) is very difficult. Select the wrong one and I am subject to double taxation, issues with the IRS or worse.

 

Anyone has any advice for someone who does not know where their bones will come to rest on this Earth? LOL!

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You can contribute until April 15, 2010 based on income you earned from working in 2009 that wasn't non-taxable in the US due to the income tax exclusion, or you can start on 2010 contributions already. You can't contribute now based on income you earned from a job you had in the US in 2008 or earlier.

 

Real estate, i.e., the property you purchase and live in is now probably the best tax shelter for US citizens resident in Germany.

 

A US citizen who is still in their 20s should be contributing the max amount to their IRA, if they are eligible.

 

To follow up on something eurovol posted earlier- you aren't contributing to US Social Security if you are working for a German employer here in Germany. Future retirees cannot expect to rely as much on public old age pensions as current retirees do, which is a primary reason why private pensions are so important.

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Thanks for the info Conquistador,

 

The US and Germany have a bilateral agreement for Social Security. I was hoping to get in under this agreement and have Germany make Social Security contributions on my behalf. Does anyone know anything about this? If I do this, then stay in Germany for more than 5 years, will I be forced to pay the German govt back pension funds for the five years they contributed to Social Security?

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We recently had a thread where the totalization agreement came up. What the totalization agreement simply does is give you enough credits for a pension if you haven't contributed enough to either country to qualify for a pension. IIRC, what you get overall is adjusted so that there is no free lunch. Germany does not make Social Security contributions to the US system on your behalf.

 

If you pay into the German public old age pension system for five years or more, you will get a German pension in addition to your US Social Security benefits, which beyond a minimum amount guaranteed to all who pay in for 10 years, are determined by the amount of Social Security taxes you paid. In the German system, IIRC, you get what you pay in (after they adjust it for changes in the country's demographic profile) assuming you have reached the qualifying period for a pension.

 

If you pay into the German system while residing here for less than five years, apply for a refund of the employee contributions you made. You can do this beginning two years after you leave Germany.

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There is a US CPA named Mike Summers who advertises here on TT. I am not a client of his, but I imagine that he would be well-placed to definitively answer your questions regarding US IRAs for nonresidents.

 

One other thing- americaninberlin, how old are you? Once you reach a certain age, it may not make sense to even contribute to an IRA. Eurovol, for example, is 48, so he's already passed that point. Someone who started at 18, or even 23, probably doesn't need to contribute additional funds once they have hit 40.

 

That would be Mark Summers and I know him well and yes he can definitely be an asset to advise you.

 

Yes, I am now 48. However, I would not stop contributing to an IRA if I were in the States and getting matching funds from my employer. The main thing is to do a cost-benefit analysis of your financial situation. This differs from person to person and while age plays a role, it can't blanketly tell you how to invest. Personally, I wouldn't even consider alternative investment strategies until I was 5-10 years away from retirement and that would be mostly due to access to funds.

 

 

Fidelity told me no, I can't make Roth IRA contributions on income I earn in Germany (from a German company).

 

No, but you can make them on money earned in the US. This may not have to be employment income and I am not sure you are limited by being a resident abroad. You will have to check on what contributions are allowed to a Roth IRA. However, this brings me back to my earlier point, why do you want a Roth and is it right for you?

 

 

I was planning to contribute to a Roth IRA with savings I have that were built on USA income. Does anyone know if this is legal? It would not be German money. I wonder if I can still move forward with my plans to convert my IRAs to Roth IRAs this year.

 

Again, talk to your IRA managing institution. They actually do know something about this and especially if they are one of the larger groups. The thing is, is continuing to contribute to an IRA, Roth or otherwise, in your best interest? That is what you need to figure out. If your future is open, then plan that way.

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Eurovol, I believe that the IRA contributions have to be made from what the tax code refers to as earned income, i.e., wages/salary, as opposed to "unearned" income such as interest.

 

Also, I think you meant matching funds for a 401k.

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I have a 401K and an IRA. In 2010, the US govt is removing income caps for rolling IRAs into Roth IRAs. I was planning to roll the IRA to a Roth and roll the 401K to an IRA and then roll the IRA to a Roth and just pay the taxes in 2011 and 2012. I had no idea that this was not legal if you are not a US resident!

A rollover is not the same as a new contribution, so a rollover may be legal even if adding new money isn't. And from post #8 it sounds as if even adding new money may be possible.

 

 

I was also planning to out 5K per year in a Roth IRA - I can use my parent's address in the US, but it will be obvious that I am abroad from my tax returns. And the whole idea that IRA or Roth distributions can be taxed in Germany, thats crazy - I'll pack it up and head back to the US before I pay taxes a second time to the German govt on the money.

Both Germany and the US levy taxes based on total worldwide income. If you are a resident of Germany, you are supposed to declare all of your income, including US-source income, and pay taxes accordingly. Then you file US taxes as well, but get a credit for taxes already paid to Germany. So you should not be paying taxes twice on the same income.

 

(disclaimer: I'm not an expert on this, just going by what I have found out in my own research)

 

My own situation is even more complex. I am self-employed and have a solo 401(k) that lets me put away a large part of my income pre-tax. If I move to Germany but can't continue to contribute from there, it almost won't be worth my working since the German top marginal tax rates are so high.

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