All Things Pension

Arin V., EA , MBA

Arin is an Enrolled Agent (EA), authorized to represent taxpayers in front of the IRS, and holds a BA and MBA (Management) degree from California State University, Northridge.

Despite the difficulties that come with being an expat, life as an expatriate can be so beautiful, exciting, and fulfilling, that sometimes all one can do is just bask in the gratitude of being able to live an interesting life outside of one’s hometown or home country.

However, sooner or later, reality sets in, and the topic of saving for one’s future comes up. Whether it is at the dinner table with your spouse, at a bar with friends, or a random conversation with colleagues, at some point, you won’t be able to avoid the discussion of saving and investing for your future. And there is a good reason for this. No matter what your future goals may be, and no matter whether you are looking for the typical life as a retiree, or whether you don’t ever plan to retire in the traditional sense, investing in a pension is a wise thing to do. Why? Because most people often underestimate how much money they will need in order to live a certain lifestyle in the future. Furthermore, if you can structure your retirement planning such that there are tax advantages too, then you will have set yourself up for a comfortable future financially.

To this end, some of the most common vehicles for investing for one’s retirement include a 401(k) plan, a Traditional IRA, a Roth IRA, and a SEP IRA. 

A 401(k) plan is an employer-sponsored retirement plan that allows you to contribute specific amounts from your paycheck directly into the plan, with the funds growing tax-free. Further, your employer may even match the contributions. For the tax year 2021, the contribution limit is $19,500. Upon making withdrawals from your 401(k) plan after reaching age 59 ½, you would pay ordinary income tax on the distributions. 

Related to a 401(k) plan is the individual retirement arrangement, or IRA. There are numerous types of IRAs, but the ones we will cover here include the Traditional IRA, Roth IRA and SEP IRA.

A Traditional IRA is a retirement plan provided by financial institutions (such as Vanguard, Charles Schwab, and so forth), in which the earnings grow tax-free, and to which the contributions are tax-deductible. Upon withdrawing the funds after age 59 ½, one pays ordinary income tax on the distributions. For tax year 2021, the contribution limit for a Traditional IRA plan is $6,000 ($7,000 if you are age 50 or older).

A Roth IRA, on the other hand, is an after-tax retirement plan provided by financial institutions, in which the earnings grow tax-free, but to which the contributions are not tax-deductible. However, upon withdrawing the funds after age 59 ½, there is no tax payable on the distributions, given tax was already paid on the contributions before making them in the first place. For tax year 2021, the contribution limit for a Roth IRA plan is $6,000 ($7,000 if you are age 50 or older).

A simplified employee pension IRA, or SEP IRA, is different from the other two types of IRAs discussed here, mainly because this is a retirement plan utilized by business owners to provide retirement benefits either to themselves, and/or to their employees. Also, the contribution limit for a SEP IRA is the lesser of up to 25% of wages, or $58,000 per year (for tax year 2021). Just like a Traditional IRA, contributions to the plan are tax-deductible, and withdrawals after age 59 ½ are taxed at ordinary income tax rates. 

Please note that if you are already covered by a retirement plan at work, you would still be able to contribute to a Traditional IRA, but the contributions might not be tax-deductible. Further, Roth IRA contributions might be limited if your income exceeds a certain level. Additionally, withdrawing the funds from these retirement accounts prior to age 59 ½ results in a 10% penalty, not to mention ordinary income tax (in the case of a Traditional or SEP IRA). Finally, with a Traditional or SEP IRA, you would have to start taking distributions from the plan when you reach age 70 ½, but not so for a Roth IRA.

Despite all of the details that one needs to look at when considering a pension plan, being an expatriate does not mean that one can ignore the importance of saving and investing. Many opt to do nothing about it, putting it off for another day. But what happens when that day comes? One of the most crucial and at the same time most neglected areas of expat finance is retirement planning. Therefore, the path to a brighter financial future as an expat starts with handling your finances. One of the best ways to do that is to participate in a pension plan, such as a 401(k) or IRA. If you have questions about what type of plan to contribute to, as well as the tax implications of doing so, please reach out to us today for a no-obligation assessment of your current and future retirement needs.