Pension/Retirement options when working abroad

In My Humble Opinion (IMHO)
#1

My friend is going to be working for a year (at least - probably several) in Austria. She’s a US citizen and as far as she knows she’ll be retiring in the US.

She’s 30 and as of yet doesn’t have an existing IRA, pension or 401k plan. She’ll be working for an Austrian university - not a US company with a branch in Austria.

Any ideas on what she should do to have a US retirement plan with the tax benefits of such a plan? (ie pre-witholding tax dollars as opposed to just a savings account, which would be post-tax money)

I suggested maybe she could open her own IRA or 401(k) account into which she deposits her own funds (as opposed to her employer depositing them) and then would be able to declare the deposits on her US federal taxes and would get a refund or something.

But I have no clue and neither does she. She asked if I would ask you guys for guidance.

#2

Having gone more-or-less the other way (i.e., having worked in the US, and now having retired to Australia – that’s the one with kangaroos and without Mozart), I can tell you that it’s going to depend on the pension fund laws of each country, and on how each treats pensions coming from the other country.

But first she needs to find out:
(1) what retirement plan is offered by the Austrian employer, which may be compulsory or optional.
(2) how her Austrian income will be treated by the U.S.

On that second point, the U.S. is unusual in taxing the world-wide income of its citizens, regardless of residence. However, there is likely to be a dual-tax treaty between the U.S. and Austria, under which Austrian income that’s taxed in Austria gets a credit in the U.S. In that context, she’ll need to look at the fine print to see how money going into an Austria retirement account is treated in U.S. income tax law, and whether money in an Austrian retirement account can be transferred into a U.S. retirement account without paying tax at either end – either when she stops working in Austria, or when she reaches retirement age in one or both countries.

In addition, her best options might be different depending on whether she works in Austria for 2 years or 20 years.

She may need to talk to two financial advisers: one in the U.S. who knows a bit about international tax issues, and one in Austria. For the second one, she should ask if there’s someone at the Austrian university who can advise her: fortunately, such a person is likely to be familiar with issues of university staff being employed from outside the country.

#3

Speaking strictly from memory (and with no knowledge of Austrian tax laws): There is, or at least once was, an exclusion on taxing income earned in foreign countries. As in, the first xx thousand dollars was not subject to US income tax. It was a big incentive for colleagues of mine to go on overseas assignments; as I recall, they were working on some long-term projects in Saudi Arabia, and saved a lot in taxes because of it (not to mention, their living expenses were paid as well).

I do not know how their income was treated for Social Security / Medicare purposes.

As far as setting up a 401(k): she can’t do that (that’s employer-driven), but she can set up an IRA. There are a number of different types (regular, IRA-SEP etc.); beyond Roth vs. regular, I don’t know what all the nuances are. If she does this, she’ll need to look into the advantages of regular vs Roth, and if regular, pre-tax vs. post-tax. My knee-jerk reaction would be that Roth would be the way to go - no taxes ever on the income, and the current income is likely to be “tax free” (if that exclusion is still in effect) so there’s no advantage to doing a pretax account.

The picture is complex enough, one way or another, that I would strongly recommend she talk to a tax specialist. I wonder if the university has other Americans on staff, and could put her in touch with them to find out what they’ve chosen to do.

#4

Some info from the IRS here. I haven’t followed any of the links but there’s one there dealing with retirement arrangements.

#5

I’ve been advised I cannot use my foreign income to fund a Roth. Can only be done with US based income.

#6

Huh. Not even the part that exceeds the exclusion (if your income is high enough to go over the “tax-free” amount that is).

Can you fund a regular IRA? Presumably it’d be post-tax (since your income is mostly excluded from tax).

Then maybe convert that to Roth money? No idea whether that’s kosher.

#7

Do you do anything for retirement savings?

#8

I googled “roth IRA foreign income” and got this:

What that suggests to me (and remember, I’m NOT a tax accountant, just someone who grew up in a household of people who were): Whatever income you’ve excluded for tax purposes, you don’t get to exclude when determining whether you’re eligible for a Roth.

Say you earned 70,000 overseas, and 50,000 here in the US. You exclude the 70,000 earned overseas for federal income taxes, so you only pay taxes on the 50,000. But when you go to figure your Roth eligibility, you add that 70K back in, so your income is 120,000. If you’re single, that exceeds the income limit of 110,000 - so no Roth.

This site seems to have some useful info for the OP.