# Can I set up 401k if living abroad to reduce my taxes?



## LC3622 (Jan 8, 2014)

Ok. Let's say I earned USD 170,000 per year living abroad. I take FEIE and HOUSING EXCLUSION. This is not enough to offset taxable income. Although I contributed to my employer's foreign pension plan, IRS does not treat foreign pension plans as qualified and wants to treat both my and my employer's contributions as current taxable income. If, for example, both my employer and I each contributes USD 10,000 per year; instead of having gross income of USD 160,000, I need to report USD 180,000 as I cannot exclude my contributions and have to include my employer's contributions. Very unfair in my view and clearly a sign how US penalises its citizens for living abroad. 

Are there any options for me to establish something like 401(k) myself and contribute tax free amount of USD 18,000 which is allowed under the US tax law? 

Any other legal ways to reduce taxable income?


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## Bevdeforges (Nov 16, 2007)

I don't believe so. A 401K is an employer plan, not an individual one. For that you would need to establish an IRA, and I believe your contributions are limited to well under $10,000 each year. You could take a look at IRS publication 590-A to check the precise requirements for establishing an IRA (whether Roth or regular).

But if your income exceeds the FEIE and Housing Exclusion amounts, you should be able to take the Foreign Tax Credit on income taxes you pay to your country of residence on the excess income.
Cheers,
Bev


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## iota2014 (Jul 30, 2015)

lucenet said:


> Ok. Let's say I earned USD 170,000 per year living abroad. I take FEIE and HOUSING EXCLUSION. This is not enough to offset taxable income. Although I contributed to my employer's foreign pension plan, IRS does not treat foreign pension plans as qualified and wants to treat both my and my employer's contributions as current taxable income. If, for example, both my employer and I each contributes USD 10,000 per year; instead of having gross income of USD 160,000, I need to report USD 180,000 as I cannot exclude my contributions and have to include my employer's contributions.


Doesn't Article 18.5 say you can?



> (i) contributions paid by or on behalf of that individual to the pension scheme during the period that he exercises the employment in the United Kingdom, and that are attributable to the employment, shall be deductible (or excludable) in computing his taxable income in the United States; and
> (ii) any benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of the individual’s employer, during that period, and that are attributable to the employment, shall not be treated as part of the employee’s taxable income in computing his taxable income in the United States.


18.5 is protected from the saving clause.


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## JustLurking (Mar 25, 2015)

iota2014 said:


> Doesn't Article 18.5 say you can? ... 18.5 is protected from the saving clause.


Yes. There is something of a question-mark over SIPPs, with some professionals considering them to *not* be covered by treaty here, but 'normal' employer schemes (which this seems to be) are generally regarded as okay.

The wrinkle is that contributions "are limited to the lesser of the amount of relief allowed for contributions and benefits under a pension scheme established in the United Kingdom and ... the amount of relief that would be allowed for contributions and benefits under a generally corresponding pension scheme established in the United States."

Assuming 'generally corresponding' is a 401k, the limit looks to be about $18k elective deferral and $35k from employer for 2016. The 'catch up' for folk above age 50 could add $6k to the $18k elective. Conversely, the 'highly compensated employee' limits could throw a spanner in the works completely.

So out at the limits it's all no clearer than mud. As usual, then.


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## iota2014 (Jul 30, 2015)

JustLurking said:


> Yes. There is something of a question-mark over SIPPs, with some professionals considering them to *not* be covered by treaty here, but 'normal' employer schemes (which this seems to be) are generally regarded as okay.
> 
> The wrinkle is that contributions "are limited to the lesser of the amount of relief allowed for contributions and benefits under a pension scheme established in the United Kingdom and ... the amount of relief that would be allowed for contributions and benefits under a generally corresponding pension scheme established in the United States."
> 
> ...


The corresponding schemes are listed in the Exchange of Notes:



> b) under the law of the United States, qualified plans under section 401(a) of the Internal Revenue Code, individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts, individual retirement annuities, section 408(p) accounts, and Roth IRAs under section 408A), section 403(a) qualified annuity plans, and section 403(b) plans.


If it was me I'd just not report the contributions - filing 8833 to be on the safe side.


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## celticweb (Mar 26, 2016)

I have one of these employee pensions scheme where both myself and employer contribute, it's a company scheme and my accountant filed the form 8833 using article 18
and an explanation under number 6 on the form.
My salary is also completely under the foreign income exclusion.
Never heard anything back and don't expect to either.


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## LC3622 (Jan 8, 2014)

celticweb said:


> I have one of these employee pensions scheme where both myself and employer contribute, it's a company scheme and my accountant filed the form 8833 using article 18
> and an explanation under number 6 on the form.
> My salary is also completely under the foreign income exclusion.
> Never heard anything back and don't expect to either.


well, if the total compensation is below the FEIE, it doesnt really affect you as you do not need to offset anything.

BTW, I read somewhere that amounts contributed by the employer are not even considered foreign earned income by the IRS AND cannot be offset by the FEIE. Yet, opinion varies on this


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## iota2014 (Jul 30, 2015)

lucenet said:


> BTW, I read somewhere that amounts contributed by the employer are not even considered foreign earned income by the IRS AND cannot be offset by the FEIE. Yet, opinion varies on this


IRS opinion is what counts:



> Amounts Not Included In Foreign Earned Income
> The previously excluded value of meals and lodging furnished for the convenience of your employer
> Pension or annuity payments including social security benefits
> Pay you receive as an employee of the U.S. Government
> ...


https://www.irs.gov/individuals/int...ncome-exclusion-what-is-foreign-earned-income

Better (and safer), surely, to go with Article 18, as per celticweb's description.


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## Bevdeforges (Nov 16, 2007)

lucenet said:


> well, if the total compensation is below the FEIE, it doesnt really affect you as you do not need to offset anything.
> 
> BTW, I read somewhere that amounts contributed by the employer are not even considered foreign earned income by the IRS AND cannot be offset by the FEIE. Yet, opinion varies on this


Employer contributed amounts are not considered income for US taxes ONLY if you're talking about a US 401K plan. (And to contribute to a 401K or a US IRA, you need income that is NOT excluded via the FEIE. You can't take just a partial FEIE so as to leave some income available.)

Where the employer contributions are taxable income, they are talking about foreign pension plans that work like (sometimes exactly like) the US tax-deferred ones.

Makes no sense - but that's how taxes work.
Cheers,
Bev


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## LC3622 (Jan 8, 2014)

Bevdeforges said:


> Employer contributed amounts are not considered income for US taxes ONLY if you're talking about a US 401K plan.



Bev, can you clarify? If employer amounts are contributed to a non qualified plan - are they earned or unearned income? I may understand why distributions are not earned income , but if I have a retirement plan at work to which both my employer and I contribute - why isn't employer contribution an earned income?


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## Bevdeforges (Nov 16, 2007)

lucenet said:


> Bev, can you clarify? If employer amounts are contributed to a non qualified plan - are they earned or unearned income? I may understand why distributions are not earned income , but if I have a retirement plan at work to which both my employer and I contribute - why isn't employer contribution an earned income?


According to what iota2014 has found, apparently your employer contributions are NOT considered foreign earned income if they are being made to a non-qualified trust or annuity. There's no "sense" to tax law. It is what it is. 
Cheers,
Bev


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## LC3622 (Jan 8, 2014)

Bevdeforges said:


> According to what iota2014 has found, apparently your employer contributions are NOT considered foreign earned income if they are being made to a non-qualified trust or annuity. There's no "sense" to tax law. It is what it is.
> Cheers,
> Bev


Another provision to hurt expats. Not surprised.


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## iota2014 (Jul 30, 2015)

lucenet said:


> Another provision to hurt expats. Not surprised.


Eh? It allows expats to exclude the contributions. How is that "a provision to hurt expats?"


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## LC3622 (Jan 8, 2014)

iota2014 said:


> Eh? It allows expats to exclude the contributions. How is that "a provision to hurt expats?"


It does not allow to exclude contributions! If it is NOT considered foreign earned income, it is considered unearned income, which means one cannot use FEIE to offset this income.


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## iota2014 (Jul 30, 2015)

lucenet said:


> It does not allow to exclude contributions! If it is NOT considered foreign earned income, it is considered unearned income, which means one cannot use FEIE to offset this income.


Suggest you read the Technical Explanation, Article 18.

https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf


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