By Marco Chong, CPA, Director
Key Takeaways
- Backdoor Roth IRAs can help high-income foreign nationals in the U.S. access tax-free retirement growth despite income limits.
This retirement strategy involves converting a Traditional Non-Deductible IRA into a Roth IRA to bypass contribution restrictions, offering long-term tax advantages. - Understanding the IRS rules around deductible contributions and after-tax conversions is critical for cross-border retirement tax planning.
Proper setup, tracking and documentation can help avoid unintended tax liabilities, especially during Roth IRA conversions. - Backdoor Roth IRAs may help reduce trailing U.S. tax liability for Expats and dual citizens who plan to retire abroad.
With proper planning, distributions from Roth IRAs are generally U.S. tax-free, even if local taxes apply in low- or no-tax jurisdictions like the UAE, Singapore or Hong Kong.
In today’s highly integrated global business environment, many executives and employees have international assignments. Foreign national expatriates (Expats) who work and live in the United States (U.S.) often apply for Green Cards or even permanent U.S. citizenship. Understanding the options available for U.S. retirement plans is critical, regardless of an Expat’s age or desired permanency. It’s wise to be informed and ready for whatever their future holds.
For Expats in the U.S.—particularly with high income or where a return to their native country is possible—consider Backdoor Roth IRAs as a retirement plan strategy. To explain why, we offer a compare/contrast.
Let’s Compare
We’ve created the comparison table below that we encourage you to share with your Expats, highlighting the differences between Traditional versus Roth IRAs. We then summarize key information about Backdoor Roth IRAs to help you explain what these accounts can accomplish as a retirement strategy.
| Traditional IRA | Roth IRA | |
| Contributions | Your contributions to a Traditional IRA can be deductible or non-deductible. If you are covered by a retirement plan at work (e.g., 401k offered by your employer), whether you may or may not deduct your Traditional IRA contributions for tax purposes depends on your income level. | The Internal Revenue Service (IRS) sets gross income limits on Roth IRAs so that high-income individuals are not allowed to open a Roth IRA account. If your Modified Adjusted Gross Income (MAGI) exceeds a certain phase-out range, you are not eligible to make direct contributions to a Roth IRA. |
| Contribution Limits | For the 2025 tax year, the contribution limit is $7,000 for individuals aged under 50. The catch-up contribution limit for individuals 50 and above is $1,000 (i.e., total $8,000 is allowed). | For the 2025 tax year, the MAGI income limit to make a full contribution is:
Note that this phases out over a range in which you may make partial contribution:
|
| Growth/ Investment Income | Any growth (i.e., investment income) on a Traditional IRA is taxable upon distribution. | The growth/investment income on a Roth IRA is not taxable upon distribution. |
| Withdrawals | For an employer-offered 401(k) plan, as example, there is an early withdrawal penalty of 10% if you withdraw before the age of 59 ½. | You can withdraw your Roth IRA contributions freely and at any time, with no associated taxes or penalties. This gives you full flexibility to manage your financial needs. |
| Required Minimum Distributions (RMDs) | RMDs apply to Traditional IRAs and 401(k) plans, meaning you must start taking distributions when you turn a certain age, currently 73 years old. | Roth IRAs do not have RMDs. Therefore, Roth IRAs let you keep your money in the account to keep growing. You decide when to begin the withdrawals and if you want to bequest the funds to your heirs. |
| Key Benefits | Your contributions may qualify for current tax deduction if your MAGI is under the phase-out ranges. For the 2025 tax year, phase-out ranges are:
Tax-deferred growth. Earnings are not subject to tax until you withdraw them in retirement. | Your contributions are after-tax dollars, but earnings are tax-free. Example:
|
The Backdoor IRA: What It Can Accomplish
With the limits noted above to both Traditional and Roth IRAs, you might consider something called a Backdoor Roth IRA for your Expats, which is a tax-planning strategy that allows high-income individuals to open a Roth IRA account despite the income limits set forth by the IRS.
How Does It Work?
The process is to open and fund a Traditional Non-Deductible IRA account first, then convert it to a Roth IRA account. There are no income limitations for contributing to a non-deductible Traditional IRA. Once the Traditional IRA is set up and you make contributions to it, you may convert it to a Roth IRA account (i.e., rolling the Non-Deductible Traditional IRA to a Roth IRA). You may convert it immediately or in subsequent years as you see fit for your personal financial plans.
An Important Nuance
Taxpayers need to be cautious that only after-tax money goes into the Roth IRA account during the conversion. If you have deducted any of your Traditional IRA contributions previously and you do the conversion to a Roth IRA, you will need to pay income tax at the conversion time. For this reason, we recommend that individuals open a non-deductible Traditional IRA account with non-deducted funds.
Primary Benefits
For foreign nationals and taxpayers who hold dual citizenships and retire outside the U.S., Roth IRA distributions will generally not create a trailing U.S. tax liability. The distributions of the principal and investment growth are both U.S.-tax-free. Even if certain foreign countries may tax it as pension income, tax planning can be done in advance, in particular, reliance on complicated tax treaties. There are tax-free countries such as the United Arab Emirates (UAE) and there are also low-tax countries like Singapore and Hong Kong for consideration.
An Important Tool in the Tax Toolbox
Foreign national Expats who obtained a Green Card or even U.S. citizenship should always take into consideration that they may return home and relinquish their legal status. Backdoor Roth IRAs are just one tool in the tax planning toolbox to simplify that process.
We Can Help
We would be happy to discuss this topic in greater detail to help improve your understanding of this tax-planning retirement strategy. We encourage you to contact the members of our team if you have any questions or would like additional information.
In the meantime, stay tuned for our next edition of Global Mobility Tax Alert that will focus on Pre-Immigration Tax Planning.
Contact Us
Our Global Mobility Team is available to assist you. Please contact the author directly or any member of the team for more information:
Marco Chong, CPA
Director
mchong@phkod.com
Leo Parmegiani, CPA
Partner
lparmegiani@pkfod.com
Ralf Ruedenburg, CPA
Partner
rruedenburg@pkfod.com
Christopher Hall
Director
chall@pkfod.com