U.S. TAX GUIDE IN INDIA

What should Americans in India know about contributing to a US IRA?

US citizens and Green Card holders living in India are generally allowed to fund a Traditional or Roth IRA in the United States if they have earned income.

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The annual limit for 2024 contributions is US$7,000 for those under 50 years of age, and US$8,000 for those 50 or older. However, your ability to contribute can be influenced by the Foreign Earned Income Exclusion (FEIE), which might reduce the amount of income eligible for IRA contributions if you exclude most or all of your foreign wages. 

If you exclude all of your earnings, you may have no remaining income to support an IRA contribution.

How can income levels influence an expat’s IRA eligibility?

Income restrictions control whether you can contribute to, or deduct amounts in, a Traditional IRA or a Roth IRA. 

If your modified adjusted gross income (MAGI) exceeds certain thresholds, you may face phaseouts or lose direct access to Roth contributions. Traditional IRA deductions may also phase out if you have a retirement plan at work and earn above specific limits. 

In fact, using the FEIE can further complicate this, since excluding foreign wages from your MAGI may leave you with less (or no) taxable income to qualify. 

Some expats choose to exclude only part of their foreign income so they maintain enough taxable earnings to fund an IRA, while others avoid the FEIE and instead rely on the Foreign Tax Credit (FTC) to offset foreign taxes.

What should US employees and self-employed individuals in India keep in mind?

If you work for a US company while in India, you may keep the same US payroll reporting and receive a Form W-2, making it simpler to calculate earned income for IRA purposes. 

Moving to an Indian payroll, however, can complicate your MAGI calculation, and it may affect your eligibility to keep contributing to US Social Security. 

Self-employed expats paying US self-employment tax continue to accrue Social Security credits, which usually count toward having earned income.

If you plan to switch jobs or start your own business in India, it’s best to review how these changes alter how you will make IRA contributions.

How do Indian retirement arrangements compare to US IRAs?

Many Americans in India participate in local savings vehicles such as the Employee Provident Fund (EPF) or the Public Provident Fund (PPF). While these accounts are treated favorably under Indian law, the US views them differently for tax purposes. 

The EPF is normally taxed in India upon withdrawal, and you must also report any withdrawal to the IRS, possibly using the FTC to avoid being taxed twice. 

The PPF is not taxed in India, but the IRS considers the interest it earns every year to be taxable income, which can create an extra US tax bill with no matching foreign tax credit. 

IRAs, on the other hand, follow specific US rules. A Traditional IRA allows your money to grow without current taxation, while Roth IRA withdrawals in retirement can be tax-free if you meet IRS requirements.

Is it still possible to have a Roth IRA while living abroad?

Yes, you can generally contribute to a Roth IRA if your MAGI remains below the official phaseout range. 

If your income is too high, you may look into the “backdoor Roth” tactic. This approach involves contributing to a non-deductible Traditional IRA, then converting those funds into a Roth IRA. 

However, if you use the FEIE to exclude all of your overseas wages, you might end up with no taxable earnings in the US, blocking you from making a direct or backdoor Roth contribution.

Why is a cross-border tax professional important?

A qualified advisor who understands both Indian and American taxes can help you determine:

  • Whether the FEIE or the FTC is better for your overall tax picture
  • If you qualify for a Traditional or Roth IRA based on your MAGI and filing status
  • How to handle Indian payroll income versus US-based income for IRA eligibility
  • How to manage any extra paperwork if you try a backdoor Roth conversion
  • The steps to coordinate Indian retirement accounts (EPF or PPF) with US accounts

What advantages can expats gain from maintaining an IRA abroad?

  • Additional Savings: IRAs provide a path to grow wealth outside of local plans, offering you choices if you later return to the United States or decide to keep your retirement funds accessible under US rules.
  • Tax-Deferred Growth or Tax-Free Withdrawals: Traditional IRA contributions grow tax-deferred, meaning you only pay US taxes when taking distributions. Roth IRA withdrawals, if the rules are met, can be free of US taxes in retirement.
  • Flexibility: By combining foreign plans with a US IRA, you diversify your long-term savings and keep some money in a familiar regulatory environment.
  • Earned Income Validation: If you remain on a US payroll or pay US self-employment taxes, you keep a verifiable record of earned income. That record can simplify your qualification for IRA contributions year by year.